11 Minute Read

Rookie Corner: How to Use Volatility to Your Advantage

November 14, 2018

By | No Comments

Pro Members have exclusive access to 31 powerful trading strategies categorized according to the Options Greeks. Bullish, bearish or neutral market conditions, this Playbook will help you trade with greater confidence.

Last Update: August 2021

Hello, friends. This is Tyler Craig pinch-hitting for Greg, the captain of Canada, while he’s away. Let’s have some fun, eh?

Market volatility is on the top of my mind, and I suspect it may be giving some of the rookies (and, ahem, veterans) among us some heartburn. I’ve compiled my top tips and tricks for weathering the turmoil and will share them below.

First, commit now to figure out how to deal with market volatility so it’s no longer the boogeyman under the bed. Coming to terms with the whoops and whirls is a million times better than fearing them. You’ll be able to sleep better at night.

Second, how you deal with volatility depends in large part on what type of trading you’re engaged in. A swing trader will adjust differently than a credit spread seller who will adjust differently than a long-term investor. What works for one style may not work for another.

Today we’ll focus on a few general tips. Perhaps another time I’ll get into specifics on individual trading styles.

Rookie Corner: How to Use Volatility to Your Advantage

What was small is now BIG

Change your expectations for what is normal, my friend. Otherwise, you’ll be surprised on a daily basis. When the ATR explodes (which it has from $1.58 to $4.68 on SPY), you must ratchet your volatility forecast higher. This is why basing stop losses and the like off of ATR is smart. It’s an adaptive indicator that gives you more room as needed.

Or, if you think the ATR is too backward-looking and prefer to peer out the windshield, then use implied volatility instead. If you have the IV Rank indicator, it displays the expected daily dollar move based on what options are pricing in. Use the “Daily 1 SD +/- ” number as your guide. For example, SPY options are currently pricing in daily moves of $3.77 which translates into percentage moves of 1.4% (3.77/270.20).

With that as my guide, I’m now expecting the market to move 1.4% or less two-thirds of the time. The other third will see moves more than 1.4%.

Take Profits Quicker

Elevated volatility works to the upside and downside. As a result of the increase in two-sided action, the gains you have today could be gone tomorrow. So use favorable moves to your advantage by ringing the register quicker. If you’re afraid you may be missing out on bigger profits down the road if the swing extends itself then scale out. That is, take partial profits. Then if the market rudely reverses you’ll have at least locked in some of the hard-fought gains.

For example, with the market down four days in a row heading into Thursday, a short-seller might consider ringing the register on a portion of his bearish positions in case we see a vicious rebound.

Looser Stops + Smaller Positions

There are two ways to reduce the risk of your trade. Buy more shares with a tighter stop loss or fewer shares with a looser stop loss. In a volatile market, the latter is undoubtedly better. Otherwise, you’ll get whipped in and out of trades too frequently. To compensate for the wider stop, you can simply buy fewer shares to prevent the total risk of the trade from becoming too large. For example, maybe instead of buying 100 shares with a $2 stop, you buy 50 shares with a $4 stop.

The Sidelines Beckon

Being out of the market wishing you were in is much better than being in the market wishing you were out. Some traders may be best served by parking themselves on the sidelines until a healthier market returns. Cash is a position, and there’s nothing quite like the peace provided by a portfolio full of dough when the volatility monster is ravaging the landscape and eating the villagers.

Traders who keep their emotional capital intact will be poised to capitalize on the next bull market that emerges after the monster’s appetite has been sated.

Tackle Trading: Financial Freedom is a Journey. Sign up now for a 15-day free trial.

Financial freedom is a journey

Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.

Legal Disclaimer

Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.

All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.

Chart Modal

Tackle Trading

Book a FREE Consultation

Sign up for a free consultation to build your Educational Plan.