Updated, April 25, 2025: This post has been adjusted to correct the spelling of Procter & Gamble.
Key Takeaways
- Tech Stocks Lead Rally Amid Earnings Uncertainty And Volatility Concerns
- Heightened Volatility Expands Trading Ranges, Impacts Investment Strategies
- Market Lacks Clear Trend; Focus Shifts To Risk Management
Stocks staged a broad rally on Thursday, led by tech stocks. The Nasdaq Composite gained 2.75%. That was followed by both the S&P 500 and Russell 2000, both gaining 2%. Meantime, the Dow Jones Industrial Average notched a gain of 1.2%. Ten of the 11 S&P sectors closed higher with Consumer Staples being the only sector to close lower.
As we get further into earnings season, we’re seeing a continuation of something that began with United Airlines. Companies are struggling when it comes to forecasting in this environment. Alphabet, who beat on their earnings report, said tariffs will be a headwind. American Airlines, PepsiCo, Procter & Gamble, and others have all specifically called out the unique nature of the current geopolitical situation and economic policies being implemented. We’re also seeing massive shifts in supply chains. Apple recently announced it hopes to move most iPhone production to India by 2026. I expect these types of announcements and changes will continue as we get earnings reports from more household-type names.
Right now, the only trend to this market is that there is no trend. Technicians and fundamentalists are all struggling to make heads or tails of what is happening. That makes for a challenging situation. Therefore, I think it’s important to take a step back here and discuss the broader trading and investing environment as well as how it might make sense to approach the market.
We are seeing a heightened level of volatility sustain itself. Even if you are not someone who trades options, this is important because higher volatility means the expected trading ranges for stocks will be wider. It was just a few months ago when the expected move in the S&P 500 was +/- 50 points for a week. Friday alone the expected move in the S&P 500 is over 60 points and looking to next week, the expected move is over 170 points. Those large, expected moves in the index trickle down to individual stocks as well. Apple has an expected move Friday of $4 whereas a couple months ago, expected moves of the day were half that.
Large moves have practical implications for both investors and traders. If you are someone who invests in stocks and does dollar cost averaging, you’ll want to take the wider trading ranges into consideration. If you were buying more stock anytime price fell 1%, you may now want to wait for 1.5% to 2%. You should also expect a greater volatility in your account value when market volatility is higher. At the moment, with the VIX around 27, the market’s daily expected moves are around 1.5x historical averages. If you have a portfolio that is closely correlated to the market, expect your daily swings to be larger.
If you are an options trader, a higher volatility market is what you want. Option premium is what we call, “rich.” What that means is, if you could normally collect $5 selling something like a put that expires in a month, you can now collect $7.50 to $10. Greater volatility means people are willing to pay more for options, this of course makes sense with puts to many people, as you see the downside protection. But those short calls, be it in a covered call or spread, may not go down as much as expected. Again, higher volatility, means that a wider range of stock movement (both up and down) is expected, so all options hold more premium.
One of the most important things when volatility is like this is keeping position size small and defining your risk before you place a trade. These types of markets will bring out a lot of Monday-morning quarterbacks, meaning it’ll be easy to say what you should have done. Before you go beating yourself up with what you should have sold or should have bought, remind yourself that there is an emotional aspect of trading. I’ve been doing this my entire adult life and I still succumb to the emotional aspects at times. Therefore, understanding your risk tolerance ahead of time is crucial, it helps take as much emotion as possible out of the trade as you have already walked through mentally, what can go wrong.
For today, I’m keeping an eye on volatility. Some of the more esoteric measures of volatility actually have come down over the past few days, and ideally, we’ll see that carry over into the VIX. However, next week is a big week for economic data and earnings. The Personal Consumption Expenditures report and employment for April are just two of the many economic reports due. Then companies like Apple and Meta Platforms, among a number of other companies, are scheduled to announce earnings. Therefore, I’m not so sure we’ll see that VIX contraction just yet. As always, I would stick with your investing plan and long-term objectives.
tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.
Options involve risk and are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially significant losses. Please read Characteristics and Risks of Standardized Options at https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document.
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