What Is Market Volatility, Really?

Throughout 2025, the media has been hyperfocused on market volatility and uncertainty. "Extreme Volatility Sends U.S. Stocks on a Roller Coaster Ride as Wall Street Is Rattled by Tariffs," writes CNN. "Uncertainty Over Tariffs Leads to Wild Swings in Markets," cautions The New York Times. "Retail Investors Grow Queasy in Squeeze of Market Volatility," warns The Wall Street Journal. It begs the question: What is market volatility, and how much should investors be concerned about it?

Brandon Kobelt, Head of Equity Derivatives at Strategas, a Baird Company, advises some of the most sophisticated institutions in the world on strategies designed to profit from market volatility. I recently spoke with him to get his perspective on elevated levels of volatility in the market and how individual investors can potentially take advantage of volatility in their portfolios.

JT: Let’s start with the basics. What is volatility and what does it tell us? 

BK: When we talk about market volatility or the volatility of a stock price, we’re really talking about how varied the returns are over time. If there’s wide variability – gains and losses greater than 1% over a period of time – we’d call that a volatile market. Through the lens of options prices, volatility gives us a glimpse into what the market’s expectations are for the future.

While the term “volatility” is often shorthand for "market unpredictability," it’s actually something very specific and measurable through what is known as the VIX, or CBOE Volatility Index. A 20 VIX suggests there’s an expectation of a 20% up-or-down 1 standard deviation move in the market over the next year. One standard deviation means there is a 66% chance the market will move up or down by that much.

JT: What is the VIX an indicator of? 

BK: The VIX that we all watch is essentially a mathematical formula. It is just a reading based on mathematics of 30-day forward options prices on the S&P 500. What are investors willing to pay for an up or down move in the S&P? That's what the VIX is telling us.

Volatility and volatility measures like the VIX can tell you what the market is implying in terms of a move, but are low-volatility periods telling you we don't have a big move coming? That might not necessarily be the case – in fact, one of the oldest sayings in the options market is "hedge when you can, not when you have to." You need both magnitude and time.

JT: From your perspective, have the past several months been unusually volatile in terms of market movements? 

BK: We have already gone through an incredibly volatile year. During the post-Liberation Day tariff shocks, the VIX rose to 60 and the U.S. stock market went down 20%. Those market losses have subsequently recovered, though, and we’ve returned to more normal volatility levels.

JT: What does “normal volatility” look like? 

BK: The lifetime average of the VIX, going back to when it was incepted in 1990, is about 19.5. So with the VIX currently averaging 21.10 this year, we are still above historically average periods of volatility right now – I would say at the higher end of a historical normal range. 

And that makes sense, because we have had a lot going on this summer. Just over the past few weeks:

• We've had G7 and Fed meetings in mid-June.
• We’ve had the Treasury General Account liquidity drain, which started on June 16.
• We’ve had an appeals court decide that President Trump's tariffs imposed under the International Emergency Economic Powers Act were unlawful.

And there are more events on the way that could add to market volatility. Strategas’ Chief Policy Analyst Dan Clifton is using an ambitious July 4 target date for the One Big Beautiful tax bill to pass, though the version that just was published by the Senate might push that out. The 90-day pause on reciprocal tariffs is scheduled to expire on July 9, and unless Congress agrees to raise the debt ceiling, the federal government could begin defaulting on its debt as soon as August 15.

Interestingly, while the U.S. airstrike of Iranian nuclear sites on June 22 had – and continues to have – a significant geopolitical impact, the volatility markets and markets in general have absorbed the headlines very well. We've also seen no disruption of crude supply, which is a big piece of that puzzle.

JT: As we approach the third quarter and look out over the rest of the year, would you expect the kind of heightened volatility and heightened risk to continue?

BK: I absolutely would. I just think there's too much going on this summer for volatility to go away. In fact, I think volatility has been persistent even throughout a 20% market rebound.

I would also say that August is typically one of the most volatile months of the year. Some liquidity will likely leave the market as portfolio managers take vacations – we’ve seen that investors will often make larger or more significant trades (buying or selling) to try to make up for time away from their portfolios. One thing I can say confidently is, politics aside, I don't think Donald Trump is a low-volatility kind of president, so I don't see volatility going back to pre-tariff or even pre-Trump levels.

JT: To wrap up, are hedging strategies using options suitable for individual investors? How should individual investors be thinking about volatility? 

BK: By their very nature, strategies that seek to profit off the volatility of the market can introduce a significant amount of portfolio risk. The tactics institutional investors and portfolio managers can use like hedging or writing call options might not be appropriate for individual investors.

That said, individual investors do have tools at their disposal to try to take advantage of the movement in the market. For example, an approach to investing called dollar cost averaging allows you to buy more shares when prices are low and fewer shares when prices are elevated – over time, that has the potential to lower your average cost per share. Periodically rebalancing your portfolio can also help you maximize any shifts in the market.

The last thing I’d add is that most volatility strategies are very short-term in focus – they’re trying to capture gains in the momentary dips and spikes in the market. If you have a time horizon of 20 or 30 years, your best strategy might be to look past the market’s day-to-day volatility and just ride out its historical upward trend.

Dollar cost averaging involves continuous investment in securities regardless of fluctuating price levels and you should consider your financial ability to continue your purchases through potentially long periods of low price levels before deciding to use this investing strategy.

The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action. The views and opinions expressed here are those of the speaker and do not necessarily reflect the views or positions of the firm.