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How To Make Money During Market Swings - YouTube
Channel: CNBC
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Well, there's no reason to believe that
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things in Ukraine are going to get any
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better.
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If you turn on CNBC, you'll probably
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hear something like this:
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indicator that the market doesn't know
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which direction to move on this and I
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wouldn't be selling at a time when the
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VIX is at 30.
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With sentiment index, the VIX, just
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remember, in the peak of the pandemic,
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we hit, you know, over 80 on the VIX,
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The volatility index, also known as the
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VIX, or even Wall Street's fear gauge.
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It's always been called the Fear Index.
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It basically takes a read of the
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market's blood pressure.
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The VIX goes higher when investors are
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scared, anxious, nervous and uncertain.
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What is the risk? What's the fear?
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What's the level of uncertainty or even
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the level of stress that's in the
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marketplace at a given time?
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It's just a unique tool that we can
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actually quantify that.
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So, even though volatility seems
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intangible, there's actually a way that
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markets measure such turbulence and
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sentiment. I mean, take a look at this
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equation.
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What does it mean for the market when
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Russia invades Ukraine, right?
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So you can see that in the VIX, and you
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can see that in real time in the VIX.
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And investors rely on it
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When you understand how investors are
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feeling about what's going on in the
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world, you can then understand how the
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market may move.
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Here's how market volatility is measured
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and how investors use that information
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to make money.
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Stock price changes are simply the
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product of people buying and selling
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stocks.
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So volatility is just price movements
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that are above normal variance.
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The reason that the VIX index was
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created was it was a way to measure
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what institutional investors or the big
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investors were doing to hedge their
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bets, and if they were hedging that the
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market was going to go down.
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That was a sign that there was fear in
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the marketplace
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When the VIX was originally introduced
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in 1993 by the Chicago Board Options
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Exchange, it had a different
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methodology based on calculations
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around the S&P 100, and that old
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measure still goes by the ticker symbol
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VXO. But since 2003, the CBOE updated
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the VIX to be based on the S&P 500.
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Because the S&P 500 is this measure of
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the broad market, the VIX is a measure
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of the volatility of the broad U.S.
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stock market.
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Usually, there is an inverse
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relationship between the activity
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that's happening in the major index,
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which is the S&P 500 and what's going
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on the base. It's generally inverse.
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The VIX is a forward looking index
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measuring implied volatility.
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As the CBOE puts it, the VIX index is
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intended to provide an instantaneous
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measure of how much the market expects
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the S&P 500 index will fluctuate.
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Within 30 days it measures to what
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degree investors are uncertain about
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the stock market.
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The movements are really triggered by
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major events.
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If it's negative news, then sometimes
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people get get a little bit scared.
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That's why when we talk about the VIX,
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we call it the Fear Index, or people
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tend to really kind of want to move and
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transition their assets out of more
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riskier assets and into more safe
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assets.
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If you look at the VIX over the past few
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years, you can see it spike when the
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pandemic hit in March 2020, which was a
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record, and then again in October 2020,
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when infections spiked and stimulus
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negotiations stalled, or in November
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2021 when Omicron swept the nation.
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Then even more recently, when Russia
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invaded Ukraine in February 2022
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Overall uncertainty also spikes the VIX.
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So when we see the VIX spiking and
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getting higher in January and leading
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in really the beginning of February,
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that was primarily around this
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uncertainty of the Fed and when they
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were going to raise rates by how much
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the pace, all of that kind of stuff.
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There's a complex mathematical equation
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at the core.
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Basically, the VIX measures volatility
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by tracking trading in S&P five hundred
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options.
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It's measuring implied volatility over
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the next 30 days, and that's derived
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from option activity.
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So puts and call options are deriving
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whether the VIX is above norm or below.
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That's the catalyst for what sparks and
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moves it in either direction.
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Now, the options market makes this a
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little tricky.
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Options are just a hedge.
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You don't own the stock outright, but
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you're owning the option that's
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tethered to the stock.
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Let's say something happens in the
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world. An event happens like the Fed's
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uncertainty or Russia invading the
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Ukraine, and investors believe that the
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overall economy is not going to be more
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positive in 30 days.
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The options contracts that they are
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buying, it's really betting on the
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market going down.
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Obviously, it can get far more
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complicated from here, but just on a
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very basic fundamental level, it's a
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hedging opportunity.
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What options contracts allow us to do is
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bet on whether a price is going to go
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up or price is going to go down.
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This is what the VIX index follows to
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gauge market volatility: those trades.
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Imagine a rollercoaster when stocks
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sell off.
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Investors may get scared so they could
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buy options to protect their
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investments. All those protective
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purchases, a.k.a.
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options, send the VIX higher.
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It's really measuring the degree of
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price movements, so I think the larger
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the price movements, the higher the
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volatility. And just to kind of put
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some things in perspective.
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VIX readings over 30 are considered
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relatively large volatility.
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VIX below 20 is an indication that the
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market is rather complacent, so there's
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not a whole lot of concern for any
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near-term volatility and or events that
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would spark a draw down
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When the VIX is popping, so it's
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soaring, it's above 19, which is its
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median, it's average.
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It is mean reverting.
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So when it moves up very quickly, it
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comes back down to its center that 19
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or its moving average, oftentimes you
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can look at the 20 day or the 50 day
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moving average.
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When it gets very far away from those
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technical levels, you can expect it to
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fall back down into that territory
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relatively quickly.
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Oftentimes, investors are always looking
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at the VIX today as, hey, 30 days from
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now, you know, we're going to be
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extremely volatile and that might not
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be the case. They're taking input data
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from today, buying activity premium
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options for today.
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That's implying the future for
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tomorrow. But tomorrow could be a very
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different day, and I think that's very
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important to make sure you take note of
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as a retail investor.
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Investors can use the VIX to help them
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make investment decisions, or they can
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indirectly invest in it.
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A couple of things that you can use the
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VIX for. Number one, it really is this
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kind of overall measure of the level of
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market risk. Stress in the market.
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And I think that that's really
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important to understand before you're
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making an investment decision.
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When we see volatility spiking, it is a
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signal for us to take a look at some of
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the names or our high conviction name
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list, you know, and see what's going on
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with these names. But it's going to be
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spiking for a number of reasons.
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It could be, you know, some other
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headline risk or headline news that's
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impacting price movement.
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And sometimes these are short term
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issues. Sometimes they're more long
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term issues where it might not be an
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opportune time to buy at this level,
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but it's a great indicator just to have
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an understanding of volatility where
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you're going and potentially what the
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price moves might look like over the
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next 30 days.
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Investors can also invest in volatility.
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They can invest in the VIX, so not
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directly, but they can do it through
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ETFs. Exchange traded funds were also
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notes when they do that, see, there's
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like a negative correlation between
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volatility and stock prices.
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So when you look at an overall
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portfolio, sometimes you need certain
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things to zig while other things are
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zagging. So that's the whole kind of
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point of asset allocation, right?
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So like stocks and bonds and and
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alternative asset classes, you have
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these different elements in a portfolio
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so that they do different things and
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they also support one another.
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When one is up, one might be down.
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When one is up, one might be just a
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little bit up. It's a good hedge for
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the S&P 500.
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Now the VIX can be used for short term
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tactical trade ideas for sure.
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Or if you are, you know, your window of
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investing is much shorter, it might be
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something you use as a key determinant
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of when you kind of switch different
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asset classes or different parts of the
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market that you want to be invested in.
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You know, the most important thing is
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having a plan, whatever you are
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investing for, whether you are a trader
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or an investor, having a sound plan,
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And if you're a long term investor, so
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you're investing for retirement, you're
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investing for something 20, 30 years
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down the road. Today's VIX price
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shouldn't concern you too much.
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Invest in you ready set grow.
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CNBC and Acorns.
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