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What is volatility?
Volatility is a measure of the dispersion around a security's average return. High volatility means the prices during the measured period are widely spread out so the standard deviation is large, while low volatility the opposite. It is a general reflection of market uncertainty and tends to be inversely correlated with the US stock market.
Not only is volatility valuable for measuring market conditions, but the volatility index (VIX) also creates the basis for tradeable futures. VIX is calculated from the implied volatility in a basket of S&P 500 put and call options. The full steps for deriving VIX can be found in the Cboe's whitepaper. The Volatility ETF universe contains products that both allow you to express views on future VIX prices and trade low volatility indices to decrease risk in choppy markets.
Also included are triple levered long/short QQQ contracts, which produces 300%/-300% of the daily returns of the Nasdaq-100. Since Nasdaq-100 companies account for a large piece of the S&P 500, you can find signals in VIX products to trade QQQ with.
Factors Affecting Volatility: TVIX, VIXY, UVXY, SVXY(short)
- A change in interest rates will impact the S&P 500, thus is correlated with VIX-tracking ETFs.
- A stronger dollar has been correlated with increased market volatility, as more investors look to buy “safe” bonds or move to cash.
- Widening spreads on Credit Default Swaps in the energy and commodities sectors can activate TVIX purchases.
- Positive national economic indicators like lower unemployment and higher GDP are correlated with low volatility.
- International turmoil: uncertain political situations, especially with trade partners, increases volatility.
- Breaking news stories, especially regarding macro factors or politically important events, can increase volatility.
- Higher corporate debt, higher interest rates, and fewer stock buybacks can be signs of switching from a low volatility to high volatility environment.
- A drop in oil prices can be considered a sign that global growth is slowing, causing higher volatility.
- Gold and treasury notes increasing in price may predict increasing volatility as investors expecting volatility look to move to a safe haven.
Alex Otsu
Low Volatility Indices: SPLV, USMV, EFAV, EEMV
These ETFs are made of companies that have historically experienced low volatility. These indices have therefore outperformed the equity markets during periods of high uncertainty. As an added bonus, EFAV and EEMV provide exposure to international markets.
Alex Otsu
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
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