With Volatility Increasing, Here Are Key Index-Based Futures and ETFs to Know About
[showmodule id=”58959″]
Volatility has risen in the stock market, potentially increasing the importance of indexed products. This post will cover some basic points you may want to know.
What Is Volatility?
What is volatility, and why does it matter? Volatility measures how much a stock or index tends to move on an annualized basis. It’s calculated historically and on an implied basis.
Historical volatility measures how much a stock or index has moved in a given time period to establish future probabilities. For example if 21-day historical volatility is 10 percent, it means that a stock is likely to rise or fall 10 percent from its current price over the next year.
Implied volatility looks at options premiums to see how much of a move is expected by the derivatives market. Generally speaking, higher options prices suggest traders expect bigger moves.
Not surprisingly, historical and implied volatilities move together. Historical volatility increases when stocks are rising and falling sharply. Implied volatility follows because options traders react to the increased turbulence in the underlying market.
What Is the VIX?
Cboe’s Volatility Index (VIX) provides investors with a measure of volatility in the stock market. VIX measures the implied volatility on S&P 500 options. Higher readings mean that the index is moving more sharply.
VIX is also known as a the “fear” index because it tends to jump when the S&P 500 is dropping. Investors can therefore use VIX to gauge sentiment and market behavior.
However just because the VIX is high doesn’t mean that stocks are going down. After all, volatility goes both ways. The main point is that volatile markets tend to drop more quickly and rise more quickly.
Volatility and Correlation
Another major point about volatility is that it correlation increases. In other words, stocks move together in a volatile market. They drop mostly in unison and rebound mostly in unison. After all, when market crashes and traders grow fearful, they tend to sell most stocks. But when things are calm, investors are more interested in picking individual stocks.
As a result, it can be more straightforward to focus on indexed products when volatility is high. Investors may have more success picking individual stocks after volatility subsides.
Here’s another way to think about it: More of a stock’s move results from the broader market (index) during periods of volatility. Therefore, it can make sense to trade the index directly rather than individual stocks. Once conditions calm, investors may have more success picking stocks.
Trading Indexes
So if indexes dominate in volatile markets, what products should investors know about? There are four major indexes. Each have exchange-traded funds (ETFs) and futures.
Exchange-traded funds are mutual funds that trade like ordinary stocks. They also have options, letting investors hedge moves in the entire market with a single product.
Futures are derivatives using special account types. They let investors go long and short the same indexes, including extended trading hours. Because they use margin, customers need to understand their unique risks (including the possibility of losing more than an initial investment).
Index
ETF
E-mini Futures (root)
Micro Futures (root)
S&P 500
SPDR S&P 500 (SPY)
ES
MES
Nasdaq-100
Invesco QQQ (QQQ)
NQ
MNQ
Dow Jones Industrial Average
DJ Industrial (DIA)
YM
MYM
Russell 2000
Russell 2000 (IWM)
RTY
M2K
Source: TradeStation Securities
Futures also have different symbols and expirations. A month code is added to the root (H for March, M for June), then the year. See this table for more on important futures contracts:
Product
Current Month
Expiration
Next Month
S&P 500 E-Mini (@ES)
ESH22 (March)
3/18/22
ESM22 (June)
*S&P 500 E-Mini Micro (@MES)
MESH22 (March)
3/18/22
MESM22 (June)
Nasdaq-100 E-Mini (@NQ)
NQH22 (March)
3/18/22
NQM22 (June)
*Nasdaq-100 E-Mini Micro (@MNQ)
MNQH22 (March)
3/18/22
MNQM22 (June)
Dow Jones E-Mini (@YM)
YMH22 (March)
3/18/22
YMM22 (June)
*Dow Jones E-Mini Micro (@MYM)
MYMH22 (March)
3/18/22
MYMM22 (June)
Russell 2000 E-Mini (@RTY)
RTYH22 (March)
3/18/22
RTYM22 (June)
*Russell 2000 E-Mini Micro (@M2K)
M2KH22 (March)
3/18/22
M2KM22 (June)
*-Micro contracts are one-tenth the size of standard e-minis.
Important Information
This content is for informational and educational purposes only. This is not research or a recommendation regarding any investment or investment strategy. Any opinions expressed herein are those of the author and do not represent the views or opinions of TradeStation Securities, Inc. or any of its affiliates. Investing involves risks. Past performance, whether actual or indicated by historical tests of strategies, is no guarantee of future performance or success. There is a possibility that you may sustain a loss equal to or greater than your entire investment regardless of which asset class you trade (equities, options, futures, digital assets, etc.); therefore, you should not invest or risk money that you cannot afford to lose. Before trading any asset class, first read the relevant risk disclosure statements on the Important Documents page, found here: www.tradestation.com/important-information.
David Russell is VP of Market Intelligence at TradeStation Group. Drawing on two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial.
Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them apprised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.
The ARK Innovation ETF has chopped in a range for the last two years, and some traders may expect a push back to longer-term lows. The first pattern on today’s chart is the rounded top in February and March. It was slightly below the peak of ... For more,...
Energy stocks have led the market this year, and now they've pulled back. The S&P Select Energy SPDR fund (XLE) jumped to $98.97 last Friday -- the highest level in almost a decade. It pulled back this week and touched $93.73 before bouncing. That was just $0.04...
Stocks hit a new record for the third straight month in March, but there was significant rotation away from growth names and technology The S&P 500 rose 3.1 percent, outpacing the Nasdaq-100 by 1.9 percentage points. It was the biggest underperformance in the...
Leaving TradeStation
You are leaving TradeStation.com for another company’s website. Click the button below to acknowledge that you understand that you are leaving TradeStation.com.
This event is hosted on YouCanTrade. The information for this event is being provided for informational and educational purposes only.
You are leaving TradeStation Securities and going to YouCanTrade. YouCanTrade is an online media publication service which provides investment educational content, ideas and demonstrations, and does not provide investment or trading advice, research or recommendations. YouCanTrade is not a licensed financial services company or investment adviser and does not offer brokerage services of any kind.
TradeStation Securities, Inc. provides support and training channels hosted on YouCanTrade, its affiliate. Other than these support and training channels, any services offered by YouCanTrade are not sponsored, endorsed, sold or promoted by TradeStation Securities and it makes no representation regarding any YouCanTrade goods or services.
To acknowledge you are leaving TradeStation Securities to go to YouCanTrade, please click
This website uses cookies to offer a better browsing experience and to collect usage information. By browsing this site with cookies enabled or by clicking on the "ACCEPT COOKIES" button you accept our Cookies Policy. To block, delete or manage cookies, please visit your browser settings. Restricting cookies will prevent you benefiting from some of the functionality of our website.ACCEPT COOKIES