The huge market swings yesterday--including a 200 point rebound in the Dow during the last half hour--may have had some traders chugging Maalox. But others thrive on the roller-coaster ride.
Don't look for the big ups and downs to stop anytime soon.
Volatility as measured by the Chicago Board Options Exchange Volatility Index (VIX) "is too high for the market to get a respite from big daily trading ranges," says Andrew Bekoff, chief investment strategist at Printz Capital Management. "As credit market worries hold center court, volatility is sure to remain elevated from the ripple effects and anxieties which traders are taking full advantage of."
Bekoff also reminds that in addition to overall market volatility, the Dow average itself magnifies individual moves made by the 30 stocks that make up the $4.3 trillion blue chip indicator.
"The Dow divisor is down to point-12 these days, meaning that a one point move in a single component of the Dow moves the whole average by 8 points."
Over the years the Dow divisor has fallen to adjust for stock splits among individual companies that make up the Dow.
Bekoff says, however, that overall market volatility is the biggest part of the story, "and right now the high VIX will cause big market swings 2 or 3 times a day, or more."
Bekoff says it will likely take a VIX decline below 20 to spur a longer lasting stock market rebound.
Those market swings point to the need to hedge gyrating equity positions.
"There are many ways to hedge an equity exposure with options," says Bud Haslett, director of option analytics at Miller Tabak. "These include purchasing puts, constructing collars, selling calls and numerous other strategies."
The subject of using options to protect your portfolio will be covered today on CNBC's "Power Lunch".
Haslett says a popular method to use in hedging is to buy exposure to volatility because of the negative correlation between indexes like the VIX and stock returns.
"The consistently high negative correlation between equity prices and volatility leads to many important hedging benefits," says Haslett who adds that with "various options and volatility products to hedge your equity exposures, there is no reason to get blind-sided the next time the stock market takes a tumble."
Going beyond the emotional swings of the market, McMillan Analysis president, Larry McMillan says the 1490 level of the S&P 500 remains upward resistance, while support remains in the 1460 area.