Tags: Volatility | VIX | ETF | markets

CNNMoney: Become Familiar With Stock Market Volatility

By    |   Wednesday, 12 February 2014 07:41 AM

Stock market volatility may be a constant for quite some time.

Just look at the Chicago Board Options Exchange Volatility Index (VIX), which has increased almost 15 percent this year, and the CNNMoney Fear and Greed Index, which has been in the Extreme Fear range for more than a week.

Stock markets and the VIX, which moves inversely to stocks, have been swinging wildly so far this year.

Editor’s Note:
5 Shocking Reasons the Dow Will Hit 60,000

"There's probably going to be a lot of up and downs in the next few months," Anthony Valeri, an investment strategist with LPL Financial, told CNNMoney. "When you see these bouts of volatility, you should treat them as a buying opportunity."

Investors are struggling to get a handle on the economy's direction. Optimism and expectations that the economy would accelerate toward escape velocity gave way to fear after weaker-than-expected employment figures for December and January. Investors aren't sure how much cold weather may have been a factor.

The winding down, or tapering, of the Federal Reserve's bond-purchasing stimulus is another cause of uncertainty, as investors are not sure if the Fed will continue its tapering pace or how the reduction will impact markets.

While some experts advise buying on the dips, others counsel staying the course.

"If you have a multi-year time frame, this is noise," Brad McMillan of Commonwealth Financial Network told CNNMoney. "More money has been lost trying to time the market than with market fluctuations."

Some investors use options or exchange-traded funds (ETFs) that are designed to prosper during periods of volatility, CNNMoney noted. More online brokers are offering options to individual customers, although those tools are only recommended for sophisticated players.

Although the CBOE Emerging Markets ETF Volatility, which moves inversely to emerging markets, is up over 20 percent this year, those kinds of ETFs will slump when markets rise.

Many traders made out well by betting that stocks would rebound, Bloomberg reported. Traders bet on stocks rebounding by buying puts on the CBOE's VIX. Puts hit a record 3.2 million on Feb. 6, according to Bloomberg. The index had reached a 13-month high of 21.44 last week, and then plummeted to 15.29 by Feb. 7.

"People who bought the dip in equity have been right," Philippe Trouve, VIX options trader and director for equity derivatives at Bank of America, told Bloomberg.

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

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Stock market volatility may be a constant for quite some time.
Wednesday, 12 February 2014 07:41 AM
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