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By: Gustian Farrow, Head of StoneX TV • Content Channels
John Kicklighter, StoneX Global Head of Content, shares how traders can measure, understand, and adapt to volatility in today’s markets.
Volatility is described as the activity level of the market over a set period of time. John Kicklighter explains that there are two types: realized (historical) volatility and implied (expected) volatility. “Volatility can just be rudimentary thought of as how active a market is or has been”. He recommends technical indicators like the average true range for measuring historical volatility, and points to the VIX as a widely used tool for implied volatility.
Kicklighter notes that traders often use indicators like the average true range to estimate likely price movement based on past data, while the VIX reflects the market’s expectation of future volatility. He explains, “We can see how much risk is the market really pricing in. And they do so by deriving from the hedging cost or the cost of risk that people are willing to pay”. These measures help traders gauge market sentiment and risk.
Traders and investors may respond differently to increased volatility. Active traders often seek out volatile markets to find opportunities, while others might avoid volatility to reduce risk. “If you see a rise in volatility, the need for a hedge, especially if you can't easily get in and out of a market, the underlying will rise”. Kicklighter stresses the importance of risk management tools like stop losses or derivatives, particularly as market conditions shift.
Sharing a personal example, Kicklighter recounts trading S&P 500 options around a surprise rate decision that led to a dramatic market move. “I had over leveraged, and I decided that it was more important to see event risk and put it in a category of possible volatility, not just assumed volatility”. He emphasizes the need to factor in event risk and adapt strategies to account for potential swings in volatility. Kicklighter advises traders to use practical measures like the VIX and average true range to set realistic expectations and manage exposure, sometimes by sitting on the sidelines until conditions improve.
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---- Written by Gus Farrow
---- Written by John Kicklighter, StoneX Global Head of Content
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