Trading markets – How to trade with volatility

We continue to see question after question from traders about how to trade with volatility. It is no surprise that we are getting these questions as the VIX index remains at unprecedented levels.

Here are a few stats around the current volatility in the SP 500:

• The daily average of the VIX through this period has been triple that of the historical 10-year average.

• Even though the S&P 500 has rallied over the past 2 weeks, the VIX is still in the mid-40s due to the immense daily moves. Remember volatility is directionless, the VIX is a measure of option buying which is prompted by the market fluctuations both up and down.

• Since COVID-19 hit the US, the average daily percentage move of the S&P 500 is +/- 4.8%. This move is higher than the daily average at the height of the GFC, the 5 weeks after the 1987 flash crash, and the later part of the Great Depression. The only time it’s been higher was during the initial 1929 crash.

• S&P 500 has now experienced 26 of the past 27 trading days moving +/-1% or more. The only other time this has happened was the Great Depression in 1929.

• Currently the S&P 500 is on a 13-day +/- 1% or more streak, if it was to continue to move 1% or more over the next 3 days, it would beat the previous record of 15 straight trading days set in October 2002. It would also beat the record of the Great Depression when it did 2 back to back 13-day streak of 1% or more in a 5-week period.

What this volatility data gives you is a trading pattern to follow.

We know in the current environment the intraday move of the S&P is likely to be +/- 1%, which is a very good daily return. This possible daily return gives us ‘time’ to discern the daily direction.

Missing the initial move is fine as we know there is likely to be a strong daily trading move, and what we gain from watching the initial trade direction is market momentum which we can then ride, and this is how you trade with volatility.