My Favorite "One-Two Punch" for Profiting from Wild Volatility

For weeks now, the markets have fixated on one dramatic element after another in the ongoing, on-again, off-again trade negotiations between the United States and China.

Tweets from Trump, speeches from Xi, offhand comments from Mnuchin - you name it, investors have grabbed onto it for dear life to justify selling or buying.

Right now, investors are obsessed with something new...

Last week, the U.S. Commerce Department blacklisted Chinese giant Huawei, halting its ability to buy American-made parts and components. I'll get into the implications of this in a minute.

Now, some adventurous, bargain-hunting buyers were testing the waters yesterday, but for the most part, the indexes and one sector in particular have been taking a pounding behind this news.

So, unless we get a trade deal in a hurry (which we won't; no one is even talking right now), we can count on uncertainty, volatility, and this desperate, headline-driven action to continue.

You might be tempted to go to cash and get out of the way, but that would be an expensive mistake.

Because you can make some nice money on the up-down volatility that's going to be with us for a while yet.

I'm going to show you a dead simple way to cash in on it.

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Why the Markets Are Having a News-Quake Right Now

Semiconductors are almost exhausting to watch this week.

The Commerce Department rules have caused a domino effect with Google suspending business activity with the company. Other Huawei suppliers followed suit, including QUALCOMM Inc. (NASDAQ: QCOM), Broadcom Inc. (NASDAQ: AVGO), Intel Corp. (NASDAQ: INTC), and Xilinx Inc. (NASDAQ: XLNX) announcing to their employees that they will be halting any selling to the Chinese firm until further notice.

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This restriction is hitting U.S. chip suppliers hard as Huawei, who happens to be one of the largest providers of telecom equipment, purchases over $20 billion of semiconductors each year. A semiconductor is an essential piece component of most electronic circuits, making it key to the production of chips.

XLNX stock fell more than 5% on Monday, QCOM dropped over 4%, and companies like AVGO, Advanced Micro Devices Inc. (NASDAQ: AMD), and others all came under pressure beneath these new restrictions as well. On top of this, the VanEck Vectors Semiconductor ETF (NYSE Arca: SMH) fell 3% as well, with most components in correction levels or worse.

At one point Monday, half of the 25 stocks in the ETF were in the red, though it's pared some of those losses as of midday yesterday.

And C.J. Muse, a senior equity research analyst at Evercore, didn't have much in the way of hope for people asking that question:

"Let's be clear - we are talking tens of billions of dollars' impact. Loss of this business would slow down investments by U.S. chipmakers, thereby reducing the competitiveness of the U.S. semiconductor industry - and that is a national security issue."

Now, I don't know how this will shake out, though I have to believe the United States and China will strike a deal someday. And I won't pretend to know what's around the corner for the semiconductor sector, though I do see some cautious bargain-buying on my screen this morning.

What I do know is the market is going to stay volatile for the foreseeable future, and that calls for an easy - but powerful - move called a "straddle."

A straddle is an options trading strategy where you buy an at-the-money (ATM) call and an ATM put with the same strike prices and expiration dates - on the same order.

This setup allows you to win no matter which way the market goes next.

It's simple: When the stock goes up enough, the calls make more money than the puts, and vice versa. But that's not the only advantage of using this strategy.

A straddle also provides you with a controlled risk - which is the net debit you pay - but also offers unlimited reward potential.

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But as with any trade setup, a straddle does come with some risk. For instance, if the stock doesn't move at all, then both the call and put lose money.

But we're talking about an extremely volatile market right now - the Chicago Board Options Exchange Volatility Index was running as high as 19 last week - which makes a straddle absolutely ideal right now.

In other words, stocks are moving a lot.

The best way to nail down the most volatile stocks at the time is to find stocks that have the highest average true range (ATR).

ATR is an indicator that helps pinpoint stocks' volatility over a 14-day range. The higher the ATR, the more volatile the stocks. And remember: We need a stock that moves wildly - no matter the direction - so by using ATR, our straddle will be even more powerful.

Now, I give specific stock research recommendations to my Fast Fortune Club Members, but once you find a stock that sports a promising ATR, here's what you do...

To get in, buy an at-the-money call and an at-the-money put with the same strike price and expiration date on the same order. Use 60- to 90-day options.

It's a good idea to get out once you've realized a 25% profit, or a 25% loss, or when you get to within 30 days of the options' expiration date.

Rest assured - this setup will let you profit in any market direction, regardless of what happens next.

Once you close out for a nice profit, click here to learn how to get all my Fast Fortune Club research.

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About the Author

Tom Gentile, options trading specialist for Money Map Press, is widely known as America's No. 1 Pattern Trader thanks to his nearly 30 years of experience spotting lucrative patterns in options trading. Tom has taught over 300,000 traders his option trading secrets in a variety of settings, including seminars and workshops. He's also a bestselling author of eight books and training courses.

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