In this quick video I'll show you how to find the current beta for any stock as it relates to the S&P 500 index and correlations. As a reminder, beta for a stock gives you a frame of reference as to how much that particular stock might move when the general market moves up or down by 1%. The higher the beta the more volatile the stock will be in relation to the market and vice versa.
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In today’s take-5 segment, I’m going to show you quickly how to find the Beta for any stock out there. I'm right here on my broker platform, and typically all you have to do, whether you have Thinkorswim, TD Ameritrade, Trade King, whenever is you just want to type in the ticker symbol of whatever stock that you’re going to look at.
In this case, I want to start with the index itself which is the S&P 500, ticker symbol SPX. This is the index that all of the Betas are weighted off of, so the Beta is going to relate to this particular main index.
And you can see over here, all the way in the right-hand corner of this ticker symbol for SPX is the actual Beta itself. For example, this index has a Beta of 1 because it relates to itself, so it’s perfectly correlated with itself which makes sense.
But let’s say you want to go look at something else, so maybe you want to look at Google and say, “Well, how correlated is Google with the actual index itself?” And in this case, you can see right over here in the right-hand corner that the Beta of Google is 1.17.
What this means is that, if the index goes up, then Google is going to go up as much as the index, plus a little bit more.
It still has a positive Beta correlation, but it’s a little bit more correlated to the market, meaning you don’t make further extremes if the price goes up on the S&P or if the price goes down. It goes the same way as the market, just a little bit further in either direction.
If we look at a different stock, say HD which is Home Depot, you can see it’s a little bit less correlated than Google was, but it’s still very, very correlated with the S&P. Home Depot is a pretty good bellwether if you want to get something that has about the same Beta as the market.
And look at something a little bit different and let’s look at TLT. TLT is a treasury bond fund ETF, and it’s one of the biggest bond ETFs that are out there that you can trade. And the Beta of this one is -65, so completely different than SPX.
And what this is saying is that generally, when the S&P 500 rallies, TLT will drop by about half the move that the S&P did. If the S&P rallies about 1%, then TLT might drop about 6%.
Basically what this is saying is that for every $1 move higher in the markets, you might get about a $.65 mover in TLT. This is a really good way to make sure that you are looking at your overall portfolio.
Not only with the options that you’re trading in your portfolio, but if you have stock and making sure that you’ve gotten yourself Beta neutral or at least you know what the Beta is for a particular stock, if you’re taking on too much risk if the market goes higher or maybe you're not taking on enough risk if the market goes higher and you have negatively correlated securities, that might really affect how your portfolio changes with fluctuations in the market.
As always, I hope you guys enjoy these quick little segments. The take-5 statements are meant to be just that 5 minutes out of your day to learn one new cool thing about options trading and investing. And as always, happy trading!