While most retail investors are focused on bitcoin, SPACS, meme investing and penny stocks, professional traders are fixated on something far more profitable and more importantly, sustainable . . . volatility.
Markets have witnessed a significant increase in volatility since the pandemic occurred just one year ago.
The significance of the strong support should not be ignored. That is why so many professionals are shifting gears to take advantage of the situation.
Unfortunately, most individual investors don’t know how to use volatility as a tool for profits. They would rather focus on the latest and greatest. Unfortunately, by that time everyone else is privy to the same information . . . and typically when that occurs, profits are in the rear-view mirror and losses start to mount.
For the uninitiated, human nature can be a huge roadblock. Fear and greed can lead us down some awful paths when investing.
Stay grounded and give yourself a reality check from time to time. You’ll be better off for it.
Which brings me back to volatility.
Volatility, or better said, implied volatility (IV), is a key measure in the options pricing model. And when IV increases, the prices of options increase.
Just look at the price of the at-the-money S&P 500 options contract with 45 days left until expiration back in December 2019 versus an SPY options contract today with the same characteristics.
IV was 13.42% in December 2019 and the price of the at-the-money call option was roughly $5.15.
S&P 500 (SPY) – January 17th 2019 312 call
S&P 500 (SPY) – April 16th 2021 376 call
So, what gives? We are using the same underlying ETF (SPY), the same time remaining until expiration (43 days) and the at-the-money strike for both examples. Yet, the prices are drastically different.
Well, you can thank the 77% increase in implied volatility for most of the increase. And it is this increase in IV that increases the price of options. And when you sell options, that significant increase in price leads to outsized gains and allows you a higher probabilities of success on each trade that you place.
But the part most retail investors don’t understand is this: Unlike the crazes I mentioned before in penny stocks, etc., when we see a spike in volatility, it tends to last for three to eight years.
We just spent the last seven years in a bear market for volatility (early 2013 – early 2020), now it’s the bull’s turn . . . a bull market in volatility.
The best part is that we’ve only just begun with this bull market in volatility.
Next week I’m going to go over a few trading examples on how I intend to continue to take advantage of heightened volatility and the bull market no one is talking about.