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There are three key measurements to determining market risk:
The trailing volatility describes how volatile the market has been by averaging out short term behavior.
VIX – also referred to as the fear index is measured from the prices of puts and call options on the S&P 500 and is considered a forward estimate of market risk. The average norm has been calculated at 20.0. You will find a weekly measurement of this risk on my website DFI Wealth Management along with four other major indexes.
Implied Volatility on long dated option is options that expire at later dates. The use of ETF( SPY ) can assist in determining this market risk.
Strategies to consider:
If risk has been low in recent years the easiest way to plan for risking market risk is to reduce exposure to high beta stocks and invest in low risk, low beta classes and stocks.
If market risk has been high in recent years a method you can use is by selling covered calls against low beta stock classes.
Options on the VIX can be considered when the VIX is appearing to rise, buying call options will provide protection.
Dan Iuculano
