How to Lower Your Risk While Taking Advantage of This Historic Trading Volatility

Looking at the wild markets this week, one thing - maybe the only thing - for sure right now is that market volatility is here to stay.

Long-term investors will want to simply stay the course. Stay disciplined and stick to your established strategy.

Of course, daily 1,000-point swings have handed us many new short-term profit opportunities. Exploiting this volatility, as many smart traders do, can be very profitable.

Smart trading does not mean trying to find a stock that will pop and time your buying perfectly, as some investors have tried to do recently. Piling in to the "hot" biotech stock that's jumping on vaccine rumors can be extremely expensive and high-risk - and it rarely pays off.

That's why I love options. In a market like this one, they allow you to get in and get out in a short time frame, with much lower risk, much lower cost, and much lower stress, as well.

Of course, huge moves like this can bring increased risk to your trades - but there's a simple way to lower that risk while taking advantage of this historic volatility...[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]

The Market Is Uncertain, but You Don't Have to Be

When markets get this volatile, I start by looking at a few key areas to get a better sense of what's happening and how long it might last.

First, the S&P 500. My chart tells me that SPY, the ETF for the S&P 500, dropped off from all-time highs over the last week or so and had about a 12% correction. We opened below the support channels Monday, but closed above, after the 1,294-point rally.

What I'll be watching to see is if the SPY can stay within those support channels, or if they'll fall below.

Then I like to look at sectors like bonds, the U.S. dollar, oil, and gold to see if they're also confirming what we're seeing here with stocks.

The iShares Barclays 20+ Year Treasury Bond ETF (NASDAQ: TLT) is an exchange-traded fund that aims to track the performance of the bond market. TLT has been on fire this year, up about 15% year to date.

What drove this higher is people "buying the rumor" that the Fed could cut rates to deal with coronavirus-related slowdown. TLT had priced in a 99% chance of a March rate cut, which we got yesterday, when the Fed announced it would cut rates by half a percentage point. We could see people "sell the news" and TLT lose some of that 15% gain.

Second up is the U.S. dollar, which was rising since beginning of the year, but has come off quite a bit since the coronavirus spread. The currency is also moving lock and step with bonds. This means that we might see the U.S. dollar ease off a bit if bonds fall on the rate cut.

Oil is a value play if I've ever seen one. We've seen about a 25% drop in oil just this year alone. That's caused the United States Oil Fund (NYSEArca: USO) to fall from about $13.50 to below $10.

Couple that with the fact that oil typically moves higher during the winter and spring months, and we're getting a low-risk value play on oil's rise. I'll be constantly looking at this opportunity as we move into spring, as well.

Finally, let's take a look at gold. The commodity had a wild week, but it's still in a long-term uptrend. It has been opening higher and closing lower in four of the last five trading sessions. While people want to go into safety, during the day, they can power right back out of it.

From what I see, gold is acting more and more like a risk-on asset than an asset to jump into in the event of a market panic.

All this confirms to me that volatility isn't over. Overall market volatility can drive up the prices of options. But to spend less when trading this market, you can find the "cheaper" plays.

Finding "Cheap" Options Trades to Lower Your Risk

As an options trader, you can take on lower risk based on the options play you decide to take.

(Of course, if you're looking for higher-risk plays, you can choose to do so.)

Typically, the more traders expect a stock price to move, the higher the option price will be. Options sellers are looking for higher premiums to offset the risk of holding that asset.

In those terms, very popular stocks have the most expensive options trading on the market right now. That includes SPDR SP 500 (NYSEArca: SPY), Bank of America Corp. (NYSE: BAC), Apple Inc. (NASDAQ: AAPL), and Microsoft Corp. (NASDAQ: MSFT).

Buying into these options plays could pay off - but it can also cost you a lot to get into.

You can lower your risk by finding stocks that have not seen as volatile price swings as the ones I just listed. The option prices on these stocks are currently the "cheapest" on the market today:

  • Inc. (NASDAQ: STMP)
  • Beyond Meat Inc. (NASDAQ: BYND)
  • GSX Techedu Inc. (NYSE: GSX)
  • Zillow Group Inc. Class A (NASDAQ: ZG)
  • Yelp Inc. (NYSE: YELP)
  • L Brands Inc. (NYSE: LB)
  • Grand Canyon Education Inc. (NASDAQ: LOPE)
  • Insperity Inc. (NYSE: NSP)
  • Lattice Semiconductor Corp. (NASDAQ: LSCC)
  • Tivity Health Inc. (NASDAQ: TVTY)

Finding the "cheaper" plays lets you get into options with a lower initial cost, but you still get a chance to multiply your return.

I'll be back later this week with more ways to trade today's market. You can always follow along in my Power Profit Trades weekly options newsletter, for free - just click here to make sure you don't miss any of my future recommendations.

And before you go, I want to show you another opportunity - a tiny corner of the market - that touches practically any industry you can think of...

Real estate... technology... financial services... the list goes on.

If you want the best shot to turn a small stake into life-changing money, this is where you want to be...

Follow Money Morning onFacebook and Twitter.

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.

Read full bio