How to Profit from Volatility in 2011

Most investors run away from a volatile market… but this is where a lot of options investors make their money.

When reviewing positions for my Resource Trader Alert subscribers, I welcome more volatility in the market!

Let me tell you why…

Volatility is one of the main factors for option premiums. It’s a measure of movement in the underlying asset, historical or implied, based on trader’s expectations.

And just like regular trading, we can profit from the good old “buy low, sell high” strategy using volatility.

As a trader, volatility means opportunity because of greater price fluctuations.

While extreme moves in either direction may be unsettling for the public at large, a disciplined trader can take advantage of the swings with a solid money management plan.

As long as the markets are moving money, there is money to be made.

The measure of volatility for the stock market is the VIX, also referred to as the fear index.

The current run to new multi-year highs in equities has lessened the worry that was rampant this summer. That can be seen by the decrease in the VIX from 40 to the current level at 16.

As you can see from the chart, the fear index has plummeted since its springtime highs. Stocks have stabilized and moved upward – thus the VIX has an inverse action over the same period.

VIX is Low, Time to Go? Not Necessarily So…

Volatility like price is relative, it can always go higher or lower than we may expect. In fact the VIX traded at 10 just back in 2007.

While it is difficult to determine exactly what “low” means, it is very possible that the current environment could heat up with some unexpected uncertainty to move the markets.

A temporary burst in volatility could provide you with the opportunity to load up when others are exiting in panic. Odds are, something around world will trigger the fear that lies just below the surface for most investors.

Patience is an important asset to options investors to get the desired overall returns.

Not to complain about the rally… but a correction in some assets would be nice for entry at better levels. Gold and silver come to mind with their powerful uptrends. But neither metal offers good reward to risk at the current prices.

In 2011, a shakeout to flush the metal markets is what I would like to see. 

Keep an eye on the VTX in the coming months and you may just find excellent entry prices for your options investments.

Sincerely,
Alan Knuckman
Penny Sleuth

December 28, 2010

How to Profit from Volatility in 2011 was originally featured in the Penny Sleuth. Check out Wall Street’s 5 Most Profitable Penny Stock Patterns Report.

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