Many people fear volatility in the market. It's no wonder because the media constantly harps on how volatility is bad for your investments.
What they don't tell you is that volatility cuts both ways. If there were no volatility, then there would be no movement in the market. Everything would just sit still. That means no gains.
The truth is we need volatility. And that's doubly true for options trades. Volatility is where the paydays come from.
In fact, Money Morning Quantitative Specialist Chris Johnson says volatility is a trader's best friend, and right now, his best call and put trades could help you reap the most of a December volatility spike.
You see, one of the great things about volatility for options traders is that we can make money no matter if the underlying stock moves higher or moves lower. The important part is pinpointing a stock to trade and then leveraging its movement with the right options trade.
After a strong few months, especially since the Oct. 30 low, stocks are in need of a little rest. Chris sees this in the CBOE Volatility Index (VIX). When stocks are looking strong, the VIX tends to fall. But lately, it has been bumping around at low levels, and that means there is really no place to go but up.
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When the VIX goes up, stocks tend to stumble. Just note that stumble does not mean collapse.
It's the proverbial "healthy correction" our friends in the media like to write about. But no matter the name, it can be the pause that refreshes markets so they can reach higher highs.
That's setting up the perfect opportunity to buy put options ahead of a spike in volatility, then turn around and buy call options for cheaper once stocks pull back a bit.
And there's one stock that's perfect for this call and put trade...
The Best Call and Put Options Trades to Make Now
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The job we have now is finding the right stock that is ripe for a pullback but is not going to roll over into a bear market. Chris points to steel-maker Cleveland-Cliffs Inc. (NYSE: CLF) as a great candidate.
Since the election, it is up 75%, and by many technical indications, is extremely overbought. Even better, it signaled that buyers got exhausted with a high-volume bearish reversal day last week. The stock made a new high for the rally but closed with a net loss on the day. This suggests that something changed in the stock's sentiment and it was not bullish.
Chris is looking for a dip right about now, perhaps to $12 or even $11 a share as traders look to lock in some of the big profits they've made over the past few weeks.
The good news is that buying in at those lower levels should set up a nice gain to the $17.50 area on the next run higher.
You can simply wait for the dip to buy shares on sale, using a good-till-canceled order at the lower prices.
Or, you can play both sides of this volatility with a put option now and a call option when the price falls. Your profit could be several times that 52% gain.
Look to buy a put with a strike price just under the stock's current price with an expiration date about two months out. When the stock approaches Chris' lower price levels, sell the put and buy a call with a strike price just above the stock's price. Use a similar expiration date, although you can go a bit longer to give the stock a little more time to reach Chris' upside target.
Volatility does cut both ways, and with options, you can win on each side.
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