3 Reasons Volatility Could Pick Up This Week

A FOMC meeting, quadruple witching and snowstorm clouds gathering over the East coast all make a heady concoction that could drive up volatility in the markets.

In market parlance, volatility is the amount of uncertainty about the magnitude of change in the value of a security. It can be calculated using the variance in the returns of a particular instrument over a period or between a security and a market index.

Interpreting Volatility

A security high in volatility to considered to be a riskier bet. An instrument, which is less volatile doesn't see wild swings but changes at a measured pace over a period of time. On the contrary, a highly volatile security swings dramatically in either direction in a shorter timeframe.

A simple approach to calculate historical volatility of a particular security is to take the closing prices of the security for the period under consideration and calculate the daily returns. The standard deviation of the returns is then found out. Since volatility is an annualized measure, the standard deviation is multiplied by the square root of an annualization factor (which could be based on the number of trading days, weeks, etc.)

Beta is the most common measure of volatility, which weighs the risk associated with an individual stock against the overall stock market risk. If beta of a stock is greater than one, then the stock is riskier and would experience bigger moves relative to the market. The reverse if the true if beta is less than one.

FOMC's Hawkish Accent

The Federal Open Market Committee is scheduled to announce its second monetary policy decision of the year on Wednesday, March 15. Along with the FOMC meeting, traders may also be keyed into the quarterly FOMC forecast and the Fed's dot plot forecast, which will throw light on the future course of monetary policy.

Fed officials have hinted a rate hike in the March meeting, even as the Trump administration seeks ways to bump up economic growth by infusing stimulus, stepping up investments and fostering job growth.

The FOMC meets eight times in a year to deliberate policy moves, although only four of these meetings -- the ones in March, June, September and December -- are accompanied by Chair's press briefing. It's assumed only in these meetings thw Fed would announce change in policy stances, as the press briefing provides leeway to explain its move.

Yellen said earlier this month a rate hike is likely, with the move hinging on employment and inflation evolving in line with the Fed's expectations.

Quadruple Witching & Volatility

Quadruple witching refers to simultaneous expiration of index futures, options, stock futures and stock options. This is scheduled for the third Friday of March, June, September and December and is characterized by high volatility and above-average volumes.

Here are the observations on how the market (taking the S&P 500 as a proxy) fared these days in the past year:

• March 18, 2016 - (+0.94 percent)
• June 17, 2016) - (+0.61 percent)
• September 16, 2016 – (+0.42 percent)
• December 16, 2016 – (-0.18 percent)

The returns could be termed as slightly above the average daily moves of the index in 2016.

Snow Beats Down

Added to that, the snowstorm that has headed to the East coast brought the area to a standstill, impacting travel, schools and offices, among others. High velocity winds lashed across the region and with the snow, formed a deadly combination, affecting visibility and cutting power lines across the region.

The major averages are all trading off their all-time highs, and reactionary moves to these key catalysts could position the markets for the near term, given the market moving capabilities of the catalysts. The risky nature of the returns may prompt some traders to exercise caution during these periods.