We’ve seen some wild price swings lately, with the biggest swing – a 617 drop on Monday – left investors frustrated wondering what could possibly come next.
And that’s why today, I’m going to dig into the six best ways to trade volatility – no matter which way the market moves.
Let’s get started…
- “Hi Tom, my thoughts are when I start seeing the swings of up and down and being new at this freaks me out, so my question is always – what do I do next?”
The most important thing you can do to relieve this anxiety is learn the strategies that we talk about. I stay under $500 for every trade – meaning that’s all you will ever risk.
That’s what is so great about options, they allow you to learn to do this at your own pace with your own personal risk. With stocks, you don’t receive this kind of luxury. You have much more skin in the game…And not to mention – your profits come much slower.
That’s why at the end of the day, I will always support options trading over stock investing – because they protect (and pay) you in a big way in the long run.
- “What’s the best way to trade through market volatility?”
There’s three rules for handling any type of volatility in the markets:
- Don’t Panic: The worst thing you can do to your portfolio is to make any kind of trading or investing decisions in a knee-jerk reaction to whatever’s triggered uncertainty in the market. So never deviate from your long-term strategy. Short-term drawdowns are just that – short term.
- Tighten Your Trades: Less risk equals less loss over a volatile period in the markets. So consider adding to your longer-term positions.
- Create Portfolio Protection: In a falling market, consider using put spreads (or “Loophole Put Spreads” as I like to call them) on market averages, such as the SPDR S&P 500 ETF (SPY).
- “How can you maximize your return – and still keep your risk low – when you just don’t know what the market’s going to do next?”
It’s easy to let your nerves get the best of you in volatile markets. But remember – you don’t need stocks to go up to turn a profit. There’s lots of money to be made, whether the market is up, down, or sideways – because you have something that other traders don’t: Money Calendar. It does not matter what the markets are doing.
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We zero in on stocks that we know, based on 10 years of historical data, and are going to move one way or the other. Then, we use flip any stock to turn tiny single-digit price moves into money-doubling trades.
- “Is it true that a recession is looming? I know the economy’s up and jobless claims are down, but I’ve been seeing a lot on the news about growing debt that’s, inevitably, going to cause a recession. I also keep seeing that we’re ‘long overdue for one?'”
You have to look at this from two perspectives: an investor’s and a trader’s. If you’re an investor, then I’m with you. The last nine years have been fantastic for the market, with the S&P 500 alone growing in a big way. And I think it’s about time for a mean reversion.
But if you’re a trader, then you shouldn’t even care about that stuff, to be perfectly honest. As a trader, you want to focus on income and volatility. Remember, as traders, it doesn’t even matter what the market’s doing. It could be up 500 points, down 1,000, or flat – and we can still make a fast, easy fortune
- How can I assure I get the most profits from my trade setups?
This is a great question, and I’m glad you asked. There’s one thing you can do that I can’t stress enough…
Always set your exit strategy/profit strategy.
You do this by identifying a profit target and then through your trading platform you will set up your trade to automatically close your position when it is hit.
- “Hi Tom, this is my first time ever trading options, and I had a couple questions… 1) when you say to close half of a trade for 100% gains or more and hold the rest, does that mean I need to buy more than one contract… and 2) what do I do when an option trade is getting close to expiration?”
These are fantastic questions! Let’s talk about the first one…
When it comes to closing half of a position, you will need to have at least two contracts because you can’t close half of one option contract. That said, it’s entirely up to you as to whether or not you choose to buy more than one contract.
As far as your second question, it’s a rare event that I ever hold options until expiration. Now there are some circumstances where it might be more beneficial to wait until expiration but that’s not always the case. One way to gauge an early exit is by looking at the direction of your trade and seeing how close or far it is from reaching your price target. For example, if you placed a call trade, but the stock fell and caused your option to lose over 50% of its value, you might want to consider making an early exit.
Before I go, we have one last thing to go over…
On Tuesday, I opened up Part 3 of your trader’s Cash Course (which you can replay right here).
So now, it’s time for us to dive headfirst into Part 4…
Let’s get started.
Good Trading,
Tom Gentile
America’s #1 Pattern Trader
