1930s Volatility is Here
If you are a long premium options trader, volatility is a necessary element to be successful. If volatility is lacking, time decay (Theta) will make this financial instrument a challenging (or even more challenging) one. These days, volatility is not lacking. In fact, volatility is thriving. For a long premium options trader, there is nothing like having market tailwinds to benefit your options strategy.
With a market that has gained 20% since March 9th bottoms and is down over 3% intra-day today (as of time of publish), 2009 has obviously been an extremely volatile year thus far. This year seems to be even more volatile than 2008, which by our calculations, was the highest level of consistent daily volatility in decades. In 2009, there have been a multitude of sessions that have seen stocks rally or fall by a significant percentage. It seems almost commonplace that the Dow Jones Industrial Average is up or down at least one percent.
Volatility can be defined in many ways (i.e. implied volatility, statistical volatility, etc.) -- in this analysis we look at volatility by the number of occurrences the Dow Jones Industrial Average rallied or declined by one percent or more on a closing basis in a trading day. More specifically, we looked at the absolute return for the Dow Jones Industrial Average for each day going back to 1928. We then calculated the number of occurrences (and the percentage) that the Dow Jones Industrial Average finished up or down more than one percent in a given year.
Below is a graph of the percentage of days out of each year that saw a market move of one percent or more. Two items that stand out are (1) the increase in volatility has soared since 2006 (from 10% to 64%) and (2) the current level of volatility only rivals the early 1930's when volatility peaked at 74%.
DJIA Daily 1% Move Graph (data as of 3/9/2009)
In 2008, there were 134 occurrences out of 253 trading dates (52.96% of days) that saw the Dow Jones Industrial Average finish up or down by one percent. This compares to the 2004 to 2007 period, which had a four-year average of 15.61%. This translates to only about 40 days per year in that four-year stretch that saw the Dow Jones Industrial Average fall or rise by one percent or more.
2009 has picked up where 2008 has left off. Our analysis was through March 9th 2009 -- as of that date we were on pace for an astonishing rate of 64% of the time the DJIA moves 1% of more on a daily closing basis. If the volatility continues through the last nine months of the year, this would be the most consistently volatile market since 1932, when the Dow Jones Industrial Average was up or down by one percent 74% of the time. Since March 9th, there has been no letup in this trend as roughly 10 of the 14 days (or 71%) are moving at this rate (as of the March 27th close). So the % pace for 2009 is actually a bit higher than the 64% utilized in the above chart.
For long premium options players, this kind volatility can be a blessing. Buying calls, puts, straddles, and strangles can be advantageous in this environment. For the "buy and hold" stock and mutual fund investor, this volatility can only be digested with a six-pack of Dramamine and Pepto Bismol.
Another takeaway for long premium option players is that the level of volatility that we have seen will likely not last forever. Periods of high volatility will generally result in a lower one, as these periods tend to cycle in and out. This trend will likely go into a dormant stage with declining volatility and less price fluctuations (although the explosion in growth of ETFs, Options, Ultra-ETFs, etc, may lessen the decline in volatility somewhat).
Thus, having an arsenal of options strategies beyond long option premium (which is always useful) will be even more important when the volatility wanes. Learning how to trade vertical credit spreads, iron condors, shorting straddles, shorting strangles, writing puts and covered calls will be important to add to one's repertoire.
(ArticlesBase SC #841861)
Article Tags:
stock
,investing
,Investment
,Options
,trading
,Retirement
,market
,retire
,invest
,Investor
,Retiree
,price Headley
,moby waller
How to Invest in an Increasingly volatile Market
Tips and advice for personal finance from the Dolans. This video focus' on how to invest in an increasingly volatile market. (07:30)
How to Invest in a Volatile Market
Tips and advice for personal finance from the Dolans. This video focus' on how to invest in a volatile market. (06:30)
How to Invest in an Increasingly Volatile Market
Concerned about the volatile market? You're not alone. Ken Dolan shares important tips to help you invest in a volatile market and still sleep well at night. (06:30)
Returns at These ETFs Could Shock You - Part 2 (Morningstar)
Due to how leveraged and inverse ETFs are compounded, volatility can lead to wildly unexpected results at these funds, explains Morningstar ETF analyst Bradley Kay. Part 2 of the series on this topic. (03:11)
Returns at These ETFs Could Shock You - Part 1 (Morningstar)
Due to how leveraged and inverse ETFs are compounded, volatility can lead to wildly unexpected results at these funds, explains Morningstar ETF analyst Bradley Kay. Part 1 in series. (04:46)
Let's play that good old-fashioned psychologist game, word association. We will throw out a company name, you make note of the first thing that pops into your head. Level 3 Communications (LVLT), American International Group (AIG), Sirius XM Radio (SIRI), Tenet Healthcare (THC), Fannie Mae (FNM), Infineon Technologies (IXF), Genworth Financial (GNW), E*Trade Financial (ETFC), and Coeur D'Alene Mines (CDE).
On the first Friday of each month at about 8:30 am est, the US Dept of Labor/Bureau of Statistics releases the Nonfarm Payrolls report. This report basically attempts to measure the change in payrolls/jobs over the past month (excluding farming industry).
Anatomy of a Market Bottom I'm not a big fan of calling bottoms or tops. Frankly, it's a guessing game, like touching an electric stove when you think it may not be on...but this game leaves most with burned hands. I prefer going for trends and higher probabilities. However, unless you think there is no value in equities (and yes, some actually DO believe this), then at some point of a market drop there will be a turn higher. So, perhaps a bottom is at hand (pun intended). There are some charact
Here at BigTrends we rarely venture into politics, unless we are analyzing the possible reactions to political events in terms of trading opportunities. We prefer to find profits for our clients through chart and sentiment analysis then to worry about what politicians are doing.
If you haven't read it, Edwin Lefevre's Reminiscences of a Stock Operator is a classic book for active investors & traders. Although written in 1923, it is filled with useful thoughts, ideas and stories for anyone interested in trading, sentiment, charting, as well as general trade money management.
Are Changes Coming Soon to the Dow Jones Industrial Average Components? by My Reckoning, There Currently are 5 Djia Components of the 30 Total Trading Under $10/share: Alcoa (aa), Bank of America (bac), Citigroup (c), General Electric (ge), and General Motors (gm). are Changes to the Index Imminent, and What are Likely Replacements?
Early last week BigTrends.com launched a new website with a lot of brand new features positioning BigTrends to become a trader's total resource. One of the best new resources is the new interactive charting feature called TrixyChart and it's completely free for BigTrends users. For active investors it's all about finding the best opportunities at the right time.
Exchange Traded Funds (ETFs) and options on ETFs have exploded in popularity in recent years. They offer securities that trade like stocks but are micro-focused in almost every sector in the markets (including international, commodity, short, ultra short, etc.). But there can be a great difference in the holdings, diversification and trade strategy of ETFs, even within one particular sector.
I got my hands on this cool universal capital growth application I had to pass it along to you. The best part is there is not cost involved! This trade application and seminar are going to show you exactly what you need to get your trade business in order. You'll be able to set realistic expectations for your income and capital growth as opposed to believing the hype you receive in your spam box every day.
This days most people want to ear money quick. This is probably one of the likely reasons why so many people are always getting scammed and always lose lot of money. Sad to say, that the "easy money" syndrome has reached the stock market and has left so many people investing intelligently on penny stocks that may always be too risky to start with. Let us study how this variety of stocks can actually be problematic to traders
An open ended investment company is a safer way to invest in stocks and shares. You can spread the risk and invest in more companies by investing in this type of scheme.
Last week was definitely one of the most action-packed weeks we’ve seen in recent Forex history. The FRWC just kept dropping one bomb after another! My sources on the inside tell me that this is just the beginning and they’ve got even more lined up this week, but for whatever reason you somehow missed the incredible stuff they sent out, they’re keeping it available for another day or so.
Thinking of making some money from stock market, well it is not that easy a task, it involves studying the market and doing some serious risk calculations. Get hold of a stock market guide to gain some knowledge on the financial environment guiding the markets, and yes, you need some amount of luck too.
Wise money management is essential for a balanced, happy life. Money stress ensuing from poor money management skills can affect our capacity to create sensible decisions, harm our relationships, affect physical and mental health, and ultimately to operate well in life. It is no exaggeration to say that poor money management breaks up marriages and breaks down hope.
It is the method of evaluating the plus and minuses of other strategy, theory or model by utilizing its past data.
If you want to get involved in stock options you need to have a number of strategies you can follow to try and make money in this way. Needless to say with this kind of involved strategy you should learn as much as you can before even attempting to make money.
If you are a long premium options trader, volatility is a necessary element to be successful. If volatility is lacking, time decay (Theta) will make this financial instrument a challenging (or even more challenging) one. These days, volatility is not lacking. In fact, volatility is thriving. For a long premium options trader, there is nothing like having market tailwinds to benefit your options strategy.
The Relationship Between Gold and Oil Prices Has Long Been Examined and There are Many Theories About It.
Are Changes Coming Soon to the Dow Jones Industrial Average Components? by My Reckoning, There Currently are 5 Djia Components of the 30 Total Trading Under $10/share: Alcoa (aa), Bank of America (bac), Citigroup (c), General Electric (ge), and General Motors (gm). are Changes to the Index Imminent, and What are Likely Replacements?
If you haven't read it, Edwin Lefevre's Reminiscences of a Stock Operator is a classic book for active investors & traders. Although written in 1923, it is filled with useful thoughts, ideas and stories for anyone interested in trading, sentiment, charting, as well as general trade money management.
1