Volatility scares a lot of people.
When wild price swings come out of nowhere, they panic. That leads to bad investment decisions.
But if you want to be a successful trader, you need to know how to take advantage of market volatility.
I’ve been trading for over 40 years. I’ve seen everything from the 1987 Black Monday crash to the 2008 global financial meltdown and the 2020 Covid crash.
And I strung together a streak of 20 consecutive profitable years during my hedge fund days.
So when volatility picks up, I’m ready to pounce.
This is especially important right now because I expect stock market gyrations to return as we head toward November’s elections.
So here’s my playbook for putting volatility on my side…
Watch for a Jump in VIX
The CBOE Volatility Index (VIX) is a popular tool for traders. It reports expected volatility in the S&P 500.
That’s why some call it Wall Street’s “fear gauge.” The VIX usually jumps higher when the S&P 500 pulls back.
That’s because daily price movements pick up when the stock market is selling off. Conversely, the VIX tends to be the lowest when stock prices are steadily grinding higher.
And there’s a reason to expect VIX to pick up in the coming month.
Historically, October sees the highest volatility levels of the year.
The chart below plots the volatility of daily returns by month for the S&P 500 going back 40 years:
You can see volatility pick up in August and September… and peak in October.
We also tend to see bigger price swings during election years.
That’s key due to seasonal trends. Seasonality looks at how the stock market tends to move during different periods of the calendar year.
Now, if you look at the S&P 500 since 1950, October sees a gain on average.
But during election years, typical seasonal trends get out of whack. October averages a loss in past election years – and is one of the year’s worst months.
So I expect volatility to pick up heading into the election.
Here’s how I’m planning to capitalize.
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Prepare for Opportunities
Options are a great tool for using volatility to your advantage.
That’s because rising volatility tends to increase an option’s value (all other things being equal).
And that’s good news for option traders.
Even better is when you buy your option while volatility is low… and sell it when volatility surges. That can quickly turn your trade into a sizeable profit.
For example, back in early August, the VIX soared to its third-highest level ever.
That volatility helped drive a large gain in QQQ puts I recommended to subscribers in my One Ticker Trader advisory.
My readers brought in a 127% gain in just eight days.
So don’t be scared if volatility levels start jumping again into the elections. Instead, watch the VIX and use options to turn it to your advantage.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict