Volatility is an analysis tool that evaluates the risk associated with individual stock, ETF, index or investment themes. It allows investors to compare stocks, ETFs, indices or investment themes by volatility, to determine the level of risk involved in each. It can also be used for identifying the ideal derivatives strategy for leveraging or hedging.
In the chart shown below, one can notice that AMAZON is currently seeing overall increase in volatility. In comparison, the S&P500 index is seeing decrease in volatility. During the last three months, there was a significant surge in AMAZON’s volatility from 3rd Apr, 2023 to 28th Apr, 2023. While there was a significant surge in the S&P500 index’s volatility from 28th Mar, 2023 to 31st Mar, 2023.
Based on this information, investors trading in AMAZON derivatives at this moment can consider ‘Covered Call’ options strategy to receive better risk-adjusted returns.
Understanding current Volatility, trend of volatility and trend of instrument is extremely important for derivatives investing. For example, when volatility is close to historical lows, investors can prefer long gamma strategies while when volatility is closer to historical highs, investors can consider short gamma strategies.
Follow these easy steps to use Alpha Builder’s tool “Volatility” to compare symbols by risk associated:
1. On the home-page, click “Alpha Builder” or select sub-menu item “ALPHA BUILDER” under the “TOOLS” head of the “PRODUCTS” menu.
2. Scroll down the page and click on “Volatility“.
3. The chart displays the volatility of ^SP500 by default.
4. Click on the left-side text-box with text as “Symbol 1“, type the symbol and click on one of the presented options.
5. Now click on the hand lens icon next to the text-box.
6. The comparative volatility of the selected symbol with ^SP500 will be displayed chartically.
7. Click on the right-side text-box with text as “Symbol 2“, type the symbol and click on one of the presented options.
8. Now click on the hand lens icon next to the text-box.
9. The comparative volatility of the two selected symbols with ^SP500 will be displayed chartically.
Useful Links:
Sector or Theme Volatility US
How to Use Alpha Builder (YouTube)