The Option Alpha Podcast 15: How Often Does The Stock Market "Crash"?
Jan 15, 2015
Curious about stock market crashes? The analysis reveals 10% declines happen every 11 months, while 15% drops occur roughly every two years. Major 20% bear markets show up about every four years. Only nine significant crashes exceeding 30% have occurred in the last century, with rare occasions of a 50% collapse. Investors often misjudge market turns, highlighted by contrasting historical State of the Union speeches and market performance. The discussion suggests using non-directional options strategies to navigate uncertainty.
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Frequency Of Market Corrections
- Stocks historically drop ≥10% about once per year, giving regular buying opportunities.
- Larger drops are rarer: ~15% every 2 years and ~20% every 4 years on average.
How Often Big Crashes Occur
- Large crashes (≥30%) occurred about nine times since 1928, roughly once per decade.
- Declines >50% happened only three times, so extreme crashes are rare in a lifetime.
Rethink Far OTM Crash Insurance
- Avoid routinely buying far out-of-the-money puts as portfolio insurance because crashes are rare.
- Reconsider spending on low-probability protection that eats returns over time.