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We've seen the Dow swing from 29,100 to 26,763 since the highs of Sept. 2 - and if that's not "volatility," I don't know what is.
That's probably pretty scary for buy-and-hold investors, but the thing is, as traders, we absolutely need that volatility; if stocks won't budge, most trades just won't make money - definitely not the kind of money that frees you up to spend an hour trading and the rest of the time doing what you want.
So we need markets to swing around a bit, and that means we also need a good plan to stay on the winning side of those big moves.
It turns out "plan your trade and trade your plan" is an old Wall Street saying for a really good reason.
Let's do it - it's easier than you might think...
One Thing I Always Watch (Besides S.C.A.N.)
I've always got a screen open where I can see the signals my proprietary S.C.A.N. algorithm is sending. I can get alerts off to my subscribers in a hot minute that way.
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But I'm also keeping tabs on volatility itself - in other words, watching for spikes and dips. Just popping over to Google Finance and checking on DJI or INX or IXIC (the Dow, S&P 500, and NASDAQ) will only give you a rough idea of what's happening.
I mean, think about it: If you were flying a jet for a living, you wouldn't just check the five-day forecast on Weather.com and hit the skies, would you? No - you'd watch out for weather on your own radar, right in front of you, in real time.
To really keep tabs on volatility, you want the infamous VIX - the Chicago Board Options Exchange Volatility Index. Maybe you've heard it called the "Fear Index."
Strictly speaking, it measures volatility on S&P 500 index options. In English, that's what the market expects to see in terms of volatility on those options in the next 30 days.
But since the S&P 500 is a big, broad equity index, the VIX makes a pretty good yardstick for volatility in stocks. The VIX reads high when there's lots of volatility; the more nervous the market, the bigger the spikes. It reads low when conditions are calm.
It almost hit 83 - an all-time intraday high - back on March 16, when it was starting to become clear that the coronavirus was going to hit like a ton of bricks and states were shutting down.
(If you're curious, the VIX's intraday all-time low was nearly 10 times lower - 8.5. That was back on Nov. 24, 2017. That was the day after Thanksgiving - a light, low-volume Black Friday.)
A high-and-getting-higher VIX reading probably means a trade opportunity, or an exit cue. When it reads low, as a trader, you can use moves like the iron condor to make some money in a flat market.
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Over the past five days, the VIX has been running in the 25 to 30 range, which, heading into October, means the market is probably going to be pretty wild until at least the end of the calendar year.
That says to me, "Keep your eyes peeled."
Tighten up accordingly; be very, very selective about stocks you might like to buy and hold - as opposed to just trading. Depending on your goals, a high VIX reading could be your signal to think about going bargain shopping.
If you're trading, think short-term. And I mean very short-term. I recommended a play on Datadog Inc. (NASDAQ: DDOG) for my subscribers on Monday. On Wednesday, we got outta Dodge with 100% profits. My 1450 Club Members got a shot at closing out a profitable trade in one day, while we were having our live Trading Room session. You can always go right here and learn how to get my research.
So that's what I mean by "short term." Be ready to exit, hopefully with profits, at a moment's notice. Don't try and chase a trade, either; if it goes against you, bail out. It won't be long until another one comes your way.
Before long, you'll be living for the days the market's going bonkers - you know, the days some folks just seem to complain about.
Now, let's look at some of the ways this plan can pay off...
How to Turn a "Rough" Day into "Payday"
One is on the VIX itself - sort of. Well, you can't actually trade the VIX, but there's an instrument - an exchange-traded note - that trades just like a stock: the iPath Series B S&P 500 Short-Term Futures ETN (BATS: VXXB).
It's not necessarily the best way to go, but this ETN tracks the performance of the VIX, so it can be profitable to go along with calls or short with puts, depending on what the VIX is doing. Just be really careful; VXXB isn't very liquid, and a few exchange-traded products tied to volatility have gone belly-up in recent years.
I'd rather trade stocks that are volatile, rather than volatility itself. You can buy and trade the SPDR S&P 500 ETF (NYSEArca: SPY) for 10 times less than the actual S&P 500, and it's ultra-liquid, so, really, there's almost never not a trade to make; in October alone, there are 13 different expiration dates, so you can easily get in and out of positions in a week or less.
The Invesco QQQ Trust (NASDAQ: QQQ) and SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA) can let you do the exact same thing with the Nasdaq and Dow, too; both of them are very liquid, and there's almost always a trade to put on.
Spreads are a really cost-effective way to do that. As I've said before, high volatility can make options premiums expensive, so if you can slash your cost by buying one put and selling another one with a lower strike price, do it to it.
You can even profit from volatility at the individual stock level, too.
Tencent Music Entertainment Group ADR (NYSE: TME) is particularly "choppy" right now, trading in a $16.35 to $14.50 range all month. There's nothing really special about this stock; I'm not in love with it, I don't hate it, its business model doesn't matter - it's just offering the right kind of movement at the right time.
To get a taste of the kinds of profits volatility can bring you, look for a put option that's just out of the money (OTM) with an expiration date at least four weeks out. The TME Nov. 20, 2020 $13 put is a good candidate.
The bottom line is, so long as you keep your eyes on it, volatility's not anything to worry about. Once you get to be an experienced trader, you'll be looking forward to those "rough" days. You'll see what I mean.
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About the Author
Andrew Keene is a globally known trader and a renowned expert on all things options.