Man has it been a wild start to the second quarter of 2020.
The Dow notched its worst first quarter in history… and the S&P 500 had its worst quarterly performance since the financial crisis.
Could we see wild price action again?
Of course, it’s been really hectic for stocks, and a lot of traders are still having a tough time out there — many have been struggling to find ways to make money with all the volatility.
If you’ve been taking it on the chin in this environment, don’t beat yourself up… and I want to help you by showing you how to take advantage of the spikes in volatility.
So how could you put yourself in a position to benefit during volatile markets?
When the market is very volatile (having violent moves in either direction), it actually affects options prices. If you don’t take into account this volatility, it could tip over your cart of cash.
You see, when uncertainty and fears rise, options actually become more expensive.
When emotions run wild, traders and fund managers pay up for options – increasing the demand and raising the prices of options.
If stocks start dropping… traders will look to buy puts to protect their portfolio… raising the demand for protection and making options more expensive.
On the other hand, when stocks are rebounding… traders shift to calls looking to take advantage of a move higher… making call options more expensive.
A Quick Note On Implied Volatility
I’m no mathematician, but options prices are calculated using a complex formula… and there are just a few factors that you need to understand that can affect an option’s price.
I’m going to break this down for you – with no math whatsoever – and we’re going to be solely focused on implied volatility… because there are actually options strategies out there that let you take advantage of drops in implied volatility.
So what’s implied volatility and why is it so crucial to understanding if you’re going to be trading options?
Well, like stocks, options are based on supply and demand… the more buyers, the more expensive options get… the more sellers, the cheaper the options.
With options, the supply and demand actually affect the implied volatility (IV for short), which is simply the market’s expectation of how much a stock can move in a specified time frame.
Sounds simple, right?
Now let me show you how this all works.
How To Time Options Trades
The CBOE Volatility Index ($VIX) was up more than 300% in Q1 2020. During times like these, it’s very easy to get caught up in trying to pick bottoms or tops to spot the overall trend.
However, when you do that… you actually put yourself at a disadvantage, especially when the markets are volatile like we’re seeing now.
So what’s the solution here?
Well, you’ve probably heard of the age-old adage… Buy low, sell high.
Think about that in reverse… you want to sell when volatility is high and buy back lower. So with volatility so juiced up, I believe now is the time to start figuring out ways to potentially profit from a massive drop in volatility.
The Strategy That Benefits From Drops In Volatility
For example, my Weekly Windfalls strategy actually benefits when volatility drops! That’s right when traders are scrambling and panicking, this strategy has the potential to shine.
How does my strategy work?
It allows me to profit in multiple scenarios, benefit from time decay, achieve high win rates… and of course, benefit when implied volatility drops.
For example, with so much volatility in the market… I don’t need to pick a direction in the options I trade. In fact, the direction doesn’t really matter.
When you buy options outright, like a call or a put, you need the stock to move in your direction and you generally need volatility to go up too.
However, when you sell options spreads, you don’t necessarily have to be right on the direction. I’m talking about using bull put spreads specifically. Again, with this strategy, we actually benefit from a drop in implied volatility.
Here’s a look at the risk profile, also known as the profit and loss (PnL) diagram, at expiration.
Basically, when you look at the risk profile, you know exactly what your max profit and max loss are. Not only that, but all you need the stock to do so that you’ll be at your maximum profit is also to stay above a specific level.
That means even if the stock falls a little, you can make money… just as long as it stays above a specific level. Moreover, if the stock trades sideways you can still profit… or if it runs higher, you’ll make money at your maximum profit.
Getting back to volatility.
If the stock actually stays above that specific level… you actually want volatility to drop… this will cause the value of both the options to decrease. In other words, the faster the volatility collapses, the faster you’ll be at your max profit.
With that being said, it makes a lot of sense to use this strategy when the markets are selling off.
Well, when markets are selling off… traders actually bid up the prices of options, causing volatility to spike. Oftentimes, those options are too expensive and the volatility collapses.
So if you’re able to sell those options when the premiums are rich, you can make money once the markets calm down.
For example, last week, I was able to benefit from this with a spread trade in Apple Inc. (AAPL).
How I Locked In A $7K Winner In AAPL
Now, AAPL appeared on my radar last Monday, which I alerted Weekly Windfalls members about.
I figured AAPL could come off chart support at $220, so I opened a bull put spread.
- Sold 225-strike put options
- And simultaneously bought 220-strike put options, to act as “options insurance” in the event AAPL fell below $220 in the options’ lifetime
And the options’ lifetime was short — and risky, which I took into account — as I used options contracts expiring in just a few days (at the time).
The spread was opened for a net credit of $2.20, or since I opened 50 spreads, and since each option controls 100 AAPL shares, the credit was $11,000 ($2.20 x 100 shares per option x 50 spreads).
That’s the absolute most I could’ve made on the trade, had I held through expiration and AAPL stayed above my $225 strike.
Here’s what I told subscribers:
And guess what?
The overall market DID bounce! And so did AAPL shares.
Guess what happened with the options premium?
The volatility got sucked out because AAPL EXPLODED higher.
I closed my AAPL spread for a cool $7,000 — slightly more than the 50% I hoped to get — and all within a couple of days.
As you can see, in this market environment… if you can spot options with juiced implied volatility, you can actually put yourself in a position to potentially generate massive returns.
If you want to see the ins and outs of my Weekly Windfalls strategy and how I’m able to maintain a high win rate even when markets are volatile, all while having defined risk, check out my exclusive training here.