Lots of investors fear the "V-word"...
Go to Google News right now and search the terms "September volatility," and you'll see all kinds of scary words like "creeps," "warns," "trouble," "worried," and "flood" associated with it. And those are just the top three stories.
Investors are clearly worried about volatility, but I'll let you in on a little secret...
Every successful trader craves volatility. We need it. Have to have it. We welcome it with open arms; I'm practically licking my chops thinking about the big swings the VIX will see in the next three or four weeks.
It's not because I'm a glutton for punishment or an adrenaline junkie or anything like that. I'm looking forward to a volatile month because the inescapable fact is we need volatility to make profits.
See, "volatility" is just a fancy Wall Street word for "movement." Up and down; great big swings and sub-1% moves. That's all volatility is.
It makes perfect sense when you think about it: If stocks never moved, no one would make a dime in the stock market.
There's something that I want each and every person reading this to understand instinctively: Volatility is your friend.
Say it with me - three times, if you have to: "Volatility is my friend."
And, folks, all signs point to this welcome friend coming for a loooong visit to the stock market in September.
Truly Unforgettable Profits Are Possible
Back in 2003, I was on CNBC when somebody called me out and said, "Nobody wants volatility! We want zero volatility so we don't have to worry."
I got the last word on that one.
I certainly remember the "Coronavirus Crash." Many investors think of it and visualize one day: March 23, which was the day the S&P 500 crashed to 2,237.
But if you're a trader, you're thinking about when it began - mid-February, not too long after the Dow hit its highest-ever 29,568.57. There were worries about the then-emerging coronavirus and the then-much-more-urgent Russian-Saudi oil price war.
People were starting to panic; everywhere you turned, there was selling, people were watching their 401(k)s bleed out. Others were putting what money they could into bonds and gold.
For buy-and-hold investors - particularly those without trailing stops in place - it was worse news after bad.
But there were abundant opportunities to profit if you recognized the volatility for what it is.
Volatility was skyrocketing - the VIX hit 27... 39... 54... 75... and ultimately an eye-watering 82 over the course of about two weeks.
Savvy traders, meanwhile, were raking it in hand over fist. My Night Trader readers got the chance to close out nine winning recommendations in a row during the crash.
Profits like that are possible because you use options to leverage these big swings in volatility - up and down. You could have a stock that loses 3% in an hour and make a play on the same stock that doubles your money in as much time.
Think about what else the crash made possible in the markets.
The Market's Got to Get Down to Get Up
The flood of Fed stimulus and government intervention threw a wet blanket on the panic, and the Nasdaq and S&P 500 have hit new all-time highs regularly. The Dow? Probably not that far behind.
Trillions in new wealth has been created, and we've got this winter's volatility to thank.
Now, I'm not saying we want the market to crash 10,000 points every month. I don't think anyone really wants that.
But events that shake the market loose, and kick out the investors that aren't really there to make money, open up more short- and even long-term opportunities.
Like I mentioned earlier, September is a big month for volatility. There's even Wall Street shorthand for it: "The September Effect." The "Stock Trader's Almanac" says the three big indexes turn in their "poorest" performance in the ninth month, with the Dow sinking 0.8% and the S&P 500 losing 0.5% on average. That's since 1950.
But that doesn't take into account the "other side of the trade" where, if you're short or trading puts, you stand to gain - and quite a lot, I might add. I can virtually guarantee the big Wall Street traders are gearing up to do just that.
Like them, we want the volatility to be fast, aggressive, and moving in the right direction for the trades we have on; shorter trades that have a time horizon of a week or so, often even less.
This September, there's even more uncertainty to contend with, whether it's from the ongoing coronavirus pandemic, social unrest, mass unemployment, or, of course, the presidential election.
In fact, by the way VIX futures are playing out, the presidential election outcome - or, as Wall Street seems to be expecting, lack of decisive outcome - is currently generating big waves. They're expecting the VIX to be 7.5 points - or nearly 29% - higher by the end of October.
That's one of the clearest signals yet that right now is the time to start looking for short trades or even trades on the VIX itself.
In the meantime, make sure to check out my latest presentation...
You see, I've had a better than 83% win rate on closed trades I've recommended since March 27 with an average profit per trade of 41% in six days. And folks, that includes the losing trades.
And if you kept that up for just 12 more days... you could have turned $475 into more than $1,300. Up the ante - and a $2,500 grubstake could have transformed into $39,000 - or more. Today, I'm letting you in on exactly how it's done...
About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.