With one month in the books, 2016 is shaping up to be a tumultuous year for stocks. Whether the market ultimately rebounds later in the year or falls even further, the only thing that seems certain is there are more big moves to come.
Implied Volatility Slightly Elevated
Investors typically describe large fluctuations in the stock market as volatility. The widely followed CBOE Volatility Index (VIX) attempts to measure expected volatility based on the pricing of S&P 500 options. When investors are willing to pay more for options, they expect larger moves in the market (and vice versa). This is called "implied volatility."
Currently, the VIX is trading around the 22 level after briefly spiking above 30 in January. The VIX is an annualized figure; thus, based on where the volatility index is trading right now, traders expect the S&P 500 to move 22% up or down in the next year.
That's a bit above the long-term average of 19.8 for the VIX.
CBOE Volatility Index
Of course, the volatility that the VIX implies and how volatile the market turns out to be are two different things.
Actual Volatility On The Rise
Historical volatility, or how volatile the market actually has been, is something that is measured based on the movements in a stock index.
Investors often use standard deviation, a statistical measure of how much the market deviates from its average return, to calculate historical volatility.
In January, stocks were particularly volatile based on this measure, with a reading of 25 for the SPDR S&P 500 ETF (SPY | A-98).
Even on a longer-term basis, the market's volatility is picking up. The rolling one-year volatility for SPY is 16.6, the highest level since October 2012.
