Volatility disappeared from the stock market.
But this is no time for investors to get distracted.
In fact, now’s the time to be alert for the next quick drop in stock prices. I’ve spent 40-plus years trading the markets… including some of the worst crashes and bear markets in history.
That includes witnessing the infamous “Black Monday” crash in 1987. I also navigated my hedge fund through the dot-com bust and 2008’s financial crisis (and handed my clients profits each time).
And market downturns mostly start the same way. Steady gains and small price swings trap investors in a sense of hope.
But complacent conditions can give way to a burst of volatility.
The good news is that if you stay prepared, you can leverage rising volatility to your advantage.
Here’s the key index you need to watch now more than ever – and how it can magnify your profit opportunities…
Measuring Volatility
The CBOE Volatility Index (VIX) reports expected volatility in the S&P 500.
It’s a broad measure of volatility across the market and is referred to as Wall Street’s “fear gauge.”
That’s because VIX spikes higher when the S&P 500 is selling off, and it falls when the S&P 500 is rising steadily.
The S&P 500’s quick drop into bear market territory on April 8 saw the VIX spike to its second-highest closing level in the past 16 years. (It averages around the 19-20 level.)
Take a look at the VIX chart below:
The VIX was hovering near the 15 level when the S&P 500 made its all-time high on February 19 (“1”).
Then you can see the sharp spike in the VIX when stocks sold off on trade war and tariff headlines. It closed at 52 on April 8 (“2”). That was the highest level since the pandemic.
But then the VIX reversed lower as the stock market rallied back toward the prior highs.
That’s brought the VIX back to an important level… and investors are getting complacent.
Conditions are setting up for a potential jump in VIX. The good news is that could mark the type of trading environment where traders thrive…
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Rising Volatility
The S&P 500 rally has brought the VIX back to an important level.
Take another look at the VIX chart below:
The VIX recently traded back toward the lows of this year (shaded area). That’s near the same level as when the S&P 500 was at record highs back in February.
But the VIX often experiences a mean reversion at extremely high or low values. When it gets too high or too low, it snaps back in the other direction.
So when the VIX gets to a low level, you need to look out for signs that it could rise from there.
And we’re seeing evidence of a jump in volatility already. The news late last week of Israel’s attack on Iran led the VIX to jump over 20.
So traders should be getting excited. Rising volatility can produce a great trading environment, especially for options.
That’s because volatility plays a big role in determining option premiums. “Premiums” simply refer to the cost of buying or selling options contracts.
Rising volatility pushes options premiums higher (all other things being equal). That means you can buy your position during low volatility for a cheaper price… and sell it once the premiums have soared. Rising VIX levels can be a huge profit boost.
Subscribers in my One Ticker Trader trading advisory have seen wins on 90% of the 20 trades we’ve closed so far this year.
Of those, 13 were closed between the S&P 500’s peak and its drop into a bear market for an average gain of 25.5% over that span (with just one losing trade).
If we’re in the early stages of another jump in volatility, then we need to be ready to capture profit opportunities ahead. If you’d like to follow my recommendations, then you can check out how to join One Ticker Trader right here.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
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