Dear Reader,
One of the things I get excited about is higher levels of volatility in the market.
And, with geopolitical events, the mid-term elections and economic concerns in general, the CPI report and bankruptcy in the crypto world, we’re seeing volatility in the S&P 500 at levels two to three times higher now than this time last year – which means you can make more money is less time with option trading.
From September to November last year, the ATR (Average True Range) technical indicator showed a 28-to-56-point average swing in the S&P 500 index over an average two-week period.
Over the past couple of months, the index is having two-week average swings between 65 and 92 points – indicating volatility levels are 2 to 3 times as high.
This simply means two things – First, option trading can be more profitable in less time, and second, selling options for income is bringing in higher premiums than they were during this time last year.
So, greater volatility translates to greater trading opportunities in the market, and I’ll share with you two ways I’m doing it.
Here’s what’s happening and causing increased volatility.
The overarching concern on our minds is inflation, which has kept volatility high for a good portion of this year.
Despite October’s CPI reading, you don’t have to look too deep to find that many of life’s daily expenses have increased on a year-over-year basis – food, shelter, fuel.
It seems there could be some relief in the future as the Fed raises interest rates to curb inflation, and the market has climbed nearly 14% off last month’s low.
But just as we’re getting some relief from the bearish trend this year, something else is has been added to the equation…
It’s as if more fuel is being added to the fire – diesel fuel, actually.
Diesel fuel shortages
Just as the market started hiking higher in the latter part of October, colder air began blanketing different regions well north of the equator, which has since increased demand for diesel fuel.
The hearty demand can’t be met by the supplies on hand, so naturally we’re seeing a rise in fuel prices – which is putting upward pressure on energy and food prices, offsetting the Fed’s objective of lowering inflation.
Unemployment is on the rise.
Adding more to the mix is unemployment.
Earlier this year we saw the headlines naming a few companies that were cutting costs by reducing their workforce. What seemed like periodic announcements has now turned into a larger wave of announcements.
This last spring, we watched GAP reduce its company size by 500 employees, while SNAP cut 20% of its workforce, followed by Wayfair’s 870 employee reduction.
And if you remember back in April, Robinhood cut 300 workers, and just recently added another 800 to the block.
Most recently, we’ve seen Tesla announce a staggering 50% reduction, and then META announced a 13% cut this week, accounting for 11,000 employees.
Well, it’s no secret that unemployment rates rise as we approach economic recessions, so this will certainly contribute to the increased levels of market volatility.
Mid-Term Elections
Market volatility picked up a bit more with mid-term elections, and with other things happening in the world, we can count on market volatility continuing.
The CPI report sent the market flying high.
The first sign of inflation subsiding was enough to send the S&P 500 rocketing 6 percent in two days, but there are two notable things with the report last week.
First of all, most of the items showed an increase in prices – particularly expensive items such as food, fuel and shelter.
And something else that’s perhaps not as easy to recognize. Last July the market rose 4.5% in only a few days, and as it did the volatility index (VIX) came down about 12%, which is a reflection of investor confidence.
On the day of the CPI report last week, the S&P 500 jumped 5.5% in a day, but noticeably the VIX fell by less than 10% – which implies a rally with caution.
Let’s see what this week brings, but I won’t get caught up in the emotions of it because I know things can change quickly during periods of high volatility.
Let’s talk about two ways to capture profits while implied volatility is high.
There are a variety of ways to trade stock options. Two basic strategies are buying options, which generally means you need the stock to move quickly in your desired direction, and selling options – a way to create regular income for your portfolio.
Members of my Quantum Data Profits have the opportunity to choose call options when we find bullish stock trends and put options on stocks that have bearish trends.
Just this past week, my Quantum Scripts software program identified both bullish and bearish trading opportunities – I’ve listed a few below:
Bullish – BTU, CROX and CSIQ
Bearish – CNXC, CRM, IGV and WIX
The reason long call and put trades are exciting when volatility is high is because greater returns can be realized in shorter periods of time – a matter of days in some cases.
And as volatility has taken the market in both directions this year, both bullish and bearish trades can bring profit.
The other way I’ve been capturing profits throughout this year is by selling options for regular income.
My proprietary software searches out stocks that are trading near value points. Once identified, I’ll gladly sell put contracts which puts money immediately in my account. After the contract expires, I can sell another put option for more income, or move on to the next opportunity.
Trading opportunities seem limitless when the volatility in the market is high.
In the end, the reasons why volatility is elevated doesn’t matter, but, instead, how I’m going to take advantage of market conditions.
I’ll be talking more about these types of trading opportunities in my Money Morning Live sessions.
I hope to see you there.
Until next time,
Tom Gentile
America’s #1 Pattern Trader
Join Tom each Monday through Wednesday at 12:00 p.m. ET as he discusses a range of strategies to make money in a strained market environment.
Did you miss the Live session? Watch Tom’s replays!
