Profit From Volatility

We reported last week that volatility would likely remain high and boy was that an understatement! The market has had extreme movements throughout the week and now with growing regularity has moves of 5% or more in just one hour of trading. Last week marked the Nov 15 deadline for hedge fund redemptions and surely that had an impact on volatility. However, fears of a deepening recession continue to grow and that too is weighing heavily on the market. The volatility will likely continue as concerns over the economy and skepticism over government interventions continue to grow. The change in administration will also bring uncertainty as new players are chosen and future plans announced. With year-end approaching, there is also the looming tax sale deadline for dumping losers which again will further pressure stocks.

But the real story is volatility and with how to take advantage of that. If the market moves strongly in one direction, there may be opportunities to play a bounce, as intraday swings of 5% or more occur quite frequently. A good way to play these short term movements is by trading options on the market indexes. In fact, we are going to look for an opportunity to buy both a call and a put on the market index with the same exercise price. If we can get in with reasonable premiums, the plan would be to hold only for a day or two, hoping to take advantage of a 5% market swing eventually in both directions. Granted, it may take a few days to get the second swing, but if trading patterns continue, the current volatility will give us a very good chance. The key will be to limit the loss on the second position if it goes against us once the first position is closed. Investors can stay abreast of all our positions and recent trades directly through our website at www.marketbeatingstocks.com.