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2022 has shaped up to be the most volatile year for the S&P 500 since 2009.
Intraday moves — the percentage difference between a stock’s price at market open and its price at market close — have averaged 1.9% year-to-date, and this year has already seen three times as many trading days with moves larger than 2% than the historical average. Market conditions like these are generally not considered ideal for making long-term investment moves as unpredictable prices make most buy or sell decisions too risky.
That’s why some are turning to short-term volatility trading as a way to hedge any losses in their portfolios without making major rebalancing decisions in such an uncertain market. Using options, futures and exchange-traded funds (ETFs), traders can track volatility in the stock market and leverage short-term strategies to turn their volatility assumptions into potentially profitable trades. Here’s how short-term volatility trading strategies work and why they can be useful in a market like this one.
What Is Volatility? Why Does It Matter?
How volatile is the current market compared to historical averages? For reference, the 40-year average intraday volatility is 1.4%, with about 23% of days seeing prices move more than 1% up or down — meaning that, for the most part, intraday price movements don’t even reach that 1.4% average.
Meanwhile, 2022 has already reached a year-to-date average of 1.9% intraday price movements, with nearly half (48.8%) of trading days seeing moves greater than 1%, including 18.8% of trading days with moves greater than 2%.
This year has also pushed the market decidedly into bear territory, with more than twice as many trading days seeing prices end 1% or more below where they started that day and triple the trading days with prices ending 2% or more below their start.
As new tools and technology make short-term trading strategies more accessible to individual investors, heightened volatility like this can become an opportunity rather than a source of anxiety. While the risk is still there, a few well-executed short-term trades can generate enough yield to help offset any losses an investor’s portfolio has experienced.
SPIKES Index Products Offer More Ways To Trade Volatility
One great way to trade volatility is with financial products that let you make trades based on your assumptions about market volatility in different ways. For example, options, futures and ETFs based on the SPIKES Index give traders a way to track expected volatility and make short-term trades based on volatility strategies like the ones mentioned earlier.
The SPIKES Index is a measure of anticipated volatility in the SPDR S&P 500 ETF (SPY), the most actively traded ETF in the world. The index uses options linked to SPY to track the expected 30-day volatility of that ETF.
This new, innovative volatility index was designed to offer more precision and accuracy than the CBOE Volatility Index (VIX® ), a popular measure of the S&P 500’s volatility. Rather than tracking options trading on just one exchange (VIX uses SPX options traded only on Cboe), SPIKES tracks SPY options that trade on all 16 U.S. options exchanges. SPIKES also publishes index values every 100 milliseconds compared to 15-second intervals for VIX and uses a proprietary price dragging methodology to avoid erratic fluctuations in the index level.
This methodology is meant to make it a more precise indicator of anticipated market volatility. While you can’t trade the index directly, there are SPIKES Options (SPIKE), Futures (SPK) and ETFs (SPKX and SPKY) available for trading.
Mean Reversion Strategies
One way to trade volatility is through a mean reversion strategy. For example, traders can buy and sell SPIKE options to not only take advantage of the expected mean reversion, but also to take advantage of rising volatility, which tends to increase the value of options. The more uncertain the market is, the more desirable options with their right to buy or sell at a guaranteed strike price can become. Traders can also use ConvexityShares ETFs, SPKX and SPKY, that were launched in August that can be used as downside protection as each of the ETFs uses futures to translate daily volatility into yield for ETF traders.
MIAX’s parent holding company, Miami International Holdings, Inc., owns Miami International Securities Exchange, LLC (MIAX®), MIAX PEARL, LLC (MIAX Pearl®), MIAX Emerald, LLC (MIAX Emerald®), Minneapolis Grain Exchange, LLC (MGEX™),The Bermuda Stock Exchange (BSX™) and Dorman Trading, LLC (Dorman Trading). MIAX, MIAX Pearl and MIAX Emerald are national securities exchanges registered with the Securities and Exchange Commission (SEC) that are enabled by MIAX’s in-house built, proprietary technology. MIAX offers trading of options on all three exchanges as well as cash equities through MIAX Pearl Equities™. The MIAX trading platform was built to meet the high-performance quoting demands of the U.S. options trading industry and is differentiated by throughput, latency, reliability and wire-order determinism. MIAX also serves as the exclusive exchange venue for cash-settled options on the SPIKES® Volatility Index (Ticker: SPIKE), a measure of the expected 30-day volatility in the SPDR® S&P 500® ETF (SPY). MGEX is a registered exchange with the Commodity Futures Trading Commission (CFTC) and offers trading in a variety of products including Hard Red Spring Wheat Futures and also serves as the exclusive market for SPIKES Futures. MGEX is a Designated Contract Market (DCM) and Derivatives Clearing Organization (DCO) under the CFTC, providing DCM, DCO and cash market services in an array of asset classes. BSX is a fully electronic, vertically integrated international securities market headquartered in Bermuda and organized in 1971. BSX specializes in the listing and trading of capital market instruments such as equities, debt issues, funds, hedge funds, derivative warrants, and insurance linked securities. Dorman Trading is a full-service Futures Commission Merchant registered with the CFTC. MIAX’s executive offices and National Operations Center are located in Princeton, N.J., with additional offices located in Miami, FL, Minneapolis, MN, Hamilton, Bermuda andChicago, IL. To learn more about MIAX visit www.MIAXOptions.com. To learn more about MGEX visit www.mgex.com. To learn more about BSX visit www.bsx.com. To learn more about Dorman Trading visit www.dormantrading.com.
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