The Coronavirus and Market Volatility 

NYSE: SPY | SPDR S&P 500 ETF Trust News, Ratings, and Charts

SPY – Today’s featured article covers just how low the S&P 500 (SPY) sunk amid COV-19 panic. Continue reading to find out just how badly the virus could affect the market.

It was just three weeks that the S&P 500 (SPY) was at an all-time high.  It has since fallen some 30% as the Covid19 virus has turned into a pandemic, threatens to shut down large swaths of the global economy and created high levels of uncertainty. This would be the quickest and steepest decline on record and includes the second largest 2-day decline, surpassing even the worst days of the financial crisis.  Only worse was the crash, or black Monday in 1987. 

cov-19 s&p 500

This rapid decline, which has seen with a handful of rip-roaring rallies within the larger sell-off, has caused the “Chicago Board of Options (CBOE)”  Volatility Index, known as the VIX, to surge to near records, also only seen during the financial crisis and Black Monday. 

cboe vix 2020 chart

The VIX currently sports a value of 70%, indicatiung that the options market is expecting or ‘pricing in’ a 4.2% daily move.  Over the past 15 days, trading the S&P 500 has had 7 days above 4.5%, including Thursday’s 10.3% decline.  Remember, the days that we barely saw half-percentage moves? It seems like a long time ago. 

This is one of the rare instances in which realized volatility is surpassing implied volatility. I’ll get to how we arrive at the specific formula for calculating the expected move. But first, a more general discussion on how we define volatility and what it can tell us about options pricing behavior. 

What sometimes gets lost in the broad discussion of VIX is the specifics of how implied volatility gets factored into individual option prices and impacts position profitability?  The term volatility gets thrown around a lot and is often used interchangeably for big moves, especially down, or perceived risk.

But for options traders, volatility, or more specifically implied volatility, has very defined meaning and is crucial to understanding the probability of profitable trading.  I often use the analogy that you don’t need to be a mechanic or know how to build an engine to drive a car, just know the gas from the brake, but having a rudimentary understanding of how the parts work and connect can help not only avoid accidents, but also enhance performance. 

Likewise, you don’t need to get all geeked out on the Black-Scholes model to trade options. But having a basic understanding of how options get priced and behave under a variety of conditions will go a long way to successful trading. 

Let’s take a look under the hood of what we mean when we talk about implied volatility. 

Implied volatility is a ‘plug number’ (a placeholder number used to make the calculation estimate correct) used to make the result from the commonly-used apparatus for valuing options, which is the Black-Scholes model. It considers five factors in calculating a particular option’s theoretical fair value:

1. The price of the underlying security

2. The strike price

3. The time, or expiration date of the option

4. Interest rates * This is becoming increasingly important in the rising rate environment and with upcoming FOMC meetings 

5. Implied volatility

options premium value chart 2020

The first four inputs are known variables. To get number five, we plug those four inputs into the Black-Scholes model, giving us “theoretical” implied volatility, which helps us decide whether an option is cheap or expensive.

But, given that options trade regularly, there is already an “actual” implied volatility assigned to each option based on its price, which is constantly updating in real-time. 

So, what does the actual or real-time implied volatility tell us?

  • IV is a proxy for standard deviation
  • Price should remain within one standard deviation of 68% of the time.

implies volatility standard deviation curve

So, a one standard deviation move = $50 x 20% = $10.  Meaning, shares are expected to stay within $40 to $60 for the year. 

 To narrow this down to shorter time frames, we use this formula.  This brings us to the ‘rule of 16’ in which you take the square root of the 256,  number of trading days in a year or 16, to calculate the expected daily move. 

 Hence; 

  • 25% IV on a $100 stock remains within $75-$125 for year 68% of the time.  
  • 25% IV:  (25/16)=1.56% daily price move. 

Again, with VIX currently at 70%, it predicting a 4.3% daily price move for the “SPDR 500 (SPY)”  

 Right now, we are in an interesting place; volatility, both real and implied, are at record levels and historically these are short-lived spikes.  But, with so much still unknown how the virus will play out or over what time frame we are likely to have above-normal volatility for an extended period.  Knowing how this will impact your positions will help them become more profitable. 


SPY shares were trading at $255.25 per share on Friday afternoon, up $7.14 (+2.88%). Year-to-date, SPY has declined -20.70%, versus a % rise in the benchmark S&P 500 index during the same period.


About the Author: Option Sensei


Steve has more than 30 years of investment experience with an expertise in options trading. He’s written for TheStreet.com, Minyanville and currently for Option Sensei. Learn more about Steve’s background, along with links to his most recent articles. More...


More Resources for the Stocks in this Article

TickerPOWR RatingIndustry RankRank in Industry
SPYGet RatingGet RatingGet Rating

Most Popular Stories on StockNews.com


Updated 2024 Stock Market Outlook

The bull market continues to rage on with the S&P 500 (SPY) making new highs. That is the past...the question is what does the future hold? That is why 44 year investment veteran Steve Reitmeister provides this updated 2024 Stock Market Outlook to help you carve a path to outperformance the rest of the year. Read on below for the full story...

3 Energy Stocks Set to Soar Beyond Expectations

Given the geopolitical tensions, increasing global oil demand, and supply adjustments, the energy sector is poised for robust growth. Therefore, investors might consider investing in energy stocks TechnipFMC (FTI), Weatherford International (WFRD), and ChampionX (CHX), which are poised to exceed expectations. Keep reading…

Has Carnival (CCL) Stock Turned Into a Buy After Earnings Release?

Carnival Corporation (CCL) reported record revenue in its most recent quarter but still faces a negative bottom line. The collapse of Francis Scott Key Bridge brings more uncertainty to its financials. Given these events, what stance should one take with CCL stock? Read more to find out…

3 China Stocks Positioned for Long-Term Growth

Despite facing challenges, the Chinese economy has demonstrated resilience, as evidenced by recent robust industrial output and retail sales data. Given this outlook, it might be an opportune time to own three top-notch China stocks, JD.com, Inc. (JD), China Automotive Systems (CAAS), and Youdao, Inc. (DAO). Read on…

Investor Alert: “Buy the Rumor, Sell the News!”

Everyone knows that the Fed is going to cut rates at some point this year. That is the worst kept secret on the planet helping to explain how we keep making new highs for the for the S&P 500 (SPY). Unfortunately that creates an interesting predicament for stocks after rates are cut. Plus another hurdle in the 2024 Presidential election. Steve Reitmeister is here to share his insights on the market outlook along with a preview of his top 12 stocks to outperform. Read on for more...

Read More Stories

More SPDR S&P 500 ETF Trust (SPY) News View All

Event/Date Symbol News Detail Start Price End Price Change POWR Rating
Loading, please wait...
View All SPY News