Unrelenting Market Volatility Forces Investors to Find Protection

Over the last few weeks, markets have been extremely turbulent, as major headwinds may have buffeted the economy. In these conditions, investors may need to protect themselves from manic price movements.

Increasing the cash holding in one's portfolio is one way to prevent losses, but many investors might need more practical methods of hedging their holdings in the event of extreme volatility.

Stock options are common instruments that enable shareholders to prevent complete loss of capital due to volatility. Option value is derived from multiple parameters, but an option's implied volatility is a particularly important measure an investor can use to gauge market movement. In essence, implied volatility can be used to determine how expensive an option contract is, so understanding option price and volatility dynamics can be beneficial for investors.

Implied volatility, however, does not necessarily measure historical fluctuations; rather, it is a forecast of the underlying asset's future volatility as perceived by the market. While many investors have used this indicator, some may want another volatility measure more laden in raw, historical data. One example is realized volatility, which is based on actual price fluctuations of an underlying asset.

Instruments based on realized volatility exist, giving traders the ability to play market fluctuations. One such product is the VolContract futures, developed by The Volatility Exchange.

Benzinga spoke with the Chairman and CEO of The Volatility Exchange, Robert Krause.

According to Krause, VolContract futures are contracts that capture the realized volatility of their underlying assets, thereby accurately reflecting price as a function of volatility seen in previous trading sessions.

Currently, The Volatility Exchange licensed futures contracts that track the EUR/USD currency pair, but the company plans to develop and license more futures instruments based on equity indices. The existing product is traded at over the counter, for investors who may be interested in using realized volatility for hedging or speculative purposes.

The market's future is uncertain, but with global events unfolding rapidly, the likelihood of volatile price movements is still high. Adding securities like VolContract futures to your portfolio may help you salvage your capital if other securities vacillate continuously.