The new presidential administration is sparking volatility.
Headlines about tariffs, tax policy, crypto, and artificial intelligence are keeping the market on edge.
But that’s good news for traders. Volatility can work in your favor… if you know how to use it.
I’m no stranger to capitalizing on sharp swings in the stock market. My 40-plus years of trading have spanned some of the worst crashes and bear markets in history.
I experienced the infamous “Black Monday” crash in 1987.
I navigated my hedge fund through 2000’s dot-com bust and 2008’s financial crisis. (And I went 20 years without a losing year spanning that time frame.)
Those types of events scare most people away from the market.
You don’t have to be one of them.
Instead, let me show you why these moments can be some of the most profitable…
Putting Volatility on Your Side
Rising volatility is a great trading environment, especially for options traders.
That’s because volatility plays a big role in determining option premiums. “Premiums” simply refer to the cost of buying options contracts.
Rising volatility pushes options premiums higher (all other things being equal). That means you can buy your position for a cheaper price… and sell it once the premiums have soared. This scenario can be a huge profit boost.
Let me show you an example of how heightened volatility can drive large gains when buying options.
Take a look at the CBOE Volatility Index (VIX) from 2024:
The VIX reports expected volatility in the S&P 500. It’s a broad measure of volatility across the market.
If you recall, a summer swoon saw a sharp stock market sell-off. The VIX jumped to its highest level in four years (the arrow).
The surge in the VIX helped drive massive gains for subscribers of my One Ticker Trader trading service. They saw a gain of 127% in just eight days during that time.
So growing signs of another jump in volatility have me excited about 2025’s trading prospects…
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A New Volatility Regime
The VIX tends to shift between high- and low-volatility environments.
For example, 2022’s bear market saw a cluster of high VIX levels. 2024, in contrast, was a period of relative calm.
But one key metric suggests that the VIX could shift back to a period of higher volatility.
There is a measure that tracks the volatility of the VIX itself – the CBOE VIX Volatility Index (VVIX).
VVIX often serves as a leading indicator for the VIX. It tips where volatility levels could be heading. We discussed how tension was building in this indicator at the end of last year.
And so far, our forecast has played out. Since the end of 2024, the VVIX has been shifting higher. Take a look at the chart below:
There have been three distinct volatility “regimes” in VVIX since the start of the decade. The shaded box at “1” shows the jump higher following the pandemic.
VVIX stayed elevated into 2022’s bear market. But then it shifted lower at the end of that year at “2.”
That signaled the return to calm, which has persisted since this most recent bull market began.
But since the end of 2024, VVIX has undergone another shift to higher levels at “3.”
That foreshadows a return of higher volatility levels in the S&P 500.
So stay tuned to the market as January comes to a close. We may be entering a prime environment to make volatility work to our advantage…
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict