How to Leverage Volatility to Your Advantage

Volatility scares a lot of traders.

When wild price swings come out of nowhere, they panic. That leads to bad investment decisions. But to be a successful trader, you need to know how to take advantage of market volatility.

I’ve been trading for over 40 years, and I’ve seen my fair share of events driving wild swings in the stock market. That includes everything from the 1987 Black Monday crash to the 2008 global financial meltdown and the 2020 Covid crash.

I also strung together a streak of 20 consecutive profitable years during my hedge fund days.

So when volatility picks up, I’m ready to pounce.

This is especially important right now because I expect stock market swings to pick up as we enter the new year.

Here’s how you can track volatility – and how I put volatility on my side…

How to Track Volatility

The CBOE Volatility Index (VIX) is a popular tool for traders. It reports expected volatility in the S&P 500.

That’s why some call it Wall Street’s “fear gauge.” The VIX usually jumps higher when the S&P 500 pulls back.

That’s because daily price movements pick up when the stock market is selling off. Conversely, the VIX tends to be at its lowest when stock prices are steadily grinding higher.

And here’s something else to note about the VIX’s behavior… The VIX will often transition between “low” and “high” volatility environments.

Look at the weekly chart of the VIX going back 30 years to see what I mean:

The dashed line on the chart is the long-term average of the VIX (around the 20 level). Notice how the VIX will spend long periods trading above or below 20.

When the VIX is below 20, we tend to get calm periods in the stock market. You often see low volatility when stocks are rising.

When the VIX is above 20, though, price swings really pick up. We often associate these times with events wreaking havoc on the stock market.

I’ve highlighted three major periods of elevated VIX levels over the past 30 years. That includes the tech bubble in the late 1990s, the period around the 2008 financial crisis, and during the pandemic (along with 2022’s bear market).

The past couple of years have seen us transition back to a mostly low-volatility environment despite a few bursts in the VIX along the way.

But looking back, extended periods of calm eventually give way to a new round of chaos. A sustained shift back above the long-term average around the 20 level can be one signal that a transition is beginning.

There’s no way of telling exactly when the VIX will jump again. But volatility is currently running near the low end of the historic range.

That makes a certain strategy to capitalize on rising volatility levels even more attractive.

Here’s how I’m planning to capitalize…

Using Volatility to Your Advantage

Options are a great tool for using volatility to your advantage.

That’s because rising volatility tends to increase an option’s value (all other things being equal). And that’s good news for option traders.

Even better is when you buy your option while volatility is low… and sell it when volatility surges. That can quickly turn your trade into a sizeable profit.

For example, back in February, the VIX started rising and ultimately soared to its highest closing level since the pandemic.

During that stretch of rising volatility, I recommended 10 trades to subscribers in my One Ticker Trader advisory. Our win rate was 90%, with gains as large as 59% in just a single day.

So don’t be scared if volatility levels start increasing as we enter a new year.

Instead, watch the VIX and use options to turn it to your advantage.

And if you’d like to get my next round of trade recommendations when the market starts getting choppier, then check out my recent explanation of how One Ticker Trader works so well in volatile moments.

Happy Trading,

Larry Benedict
Editor, Trading With Larry Benedict