What is Volatility?
Volatility is a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security. Volatility is often measured as either the standard deviation or variance between returns from that same security or market index.
In the securities markets, volatility is often associated with big swings in either direction. For example, when the stock market rises and falls more than one percent over a sustained period of time, it is called a “volatile” market. An asset’s volatility is a key factor when pricing options contracts.
What is the Empirical Rule?
The empirical rule, also referred to as the three-sigma rule or 68-95-99.7 rule, is a statistical rule which states that for a normal distribution, almost all data falls within three standard deviations (denoted by σ) of the mean (denoted by µ). Broken down, the empirical rule shows that 68% falls within the first standard deviation (µ ± σ), 95% within the first two standard deviations (µ ± 2σ), and 99.7% within the first three standard deviations (µ ± 3σ).
Take the VIX which is around 65. The daily standard deviation move will be (65/sqrt(252))=4.1%.
Three standard deviations would mean around +-12% swings! And this is what we observed in the last couple of days. Unlikely, yet possible.
What should you do?
Decide for yourself in which direction the market is heading and bet as much as you are comfortable with holding, even if you lose a big chunk of it. Volatility gives and takes. Changing your overall sentiment with every swing will stress you and make you lose these hard-earned tendies.
My positions: SPY 6/19p 192, SPY 6/19p 200.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.