It’s no secret that the stock market is a volatile place. The ups and downs can be exciting for some, but they can also be nerve-wracking if you’re not prepared. One way to make money during these times is by selling options. When options volatility is high, you can sell options at a higher price than you would when volatility is low. In this post, we will discuss how to make money during market volatility and how to protect yourself from downside risk.
We discuss:
- What is market volatility?
- Selling stock options in high volatility
- High volatility option trading rules
Real quick guys, please comment and let me know your thoughts below.
Also, be sure and grab the FREE Simplified Options Strategies Trading Guide. I’ll put a link down below. It covers the different options strategies setups, how and when to put them on, max profits, and trade management. It’s a great guide to have by your side when trading options.
So let’s get started!
What is market volatility?
Volatility is a measure of how much the price of a security, like a stock, ETF or commodity, fluctuates over time. It’s often used as a gauge of risk. The higher the volatility, the greater the risk.
Volatility can be caused by many factors, including economic news, earnings announcements, and global events. For example, the Covid-19 pandemic caused high volatility in the stock market.
There are two types of volatility: historical and implied. Historical volatility looks at past price movements to calculate how much the security has fluctuated. Implied volatility looks at the market’s expectations for future price movements. It’s based on the price of options contracts for the security.
High volatility means that a security’s price is moving up and down rapidly, and it’s considered riskier than low-volatility securities. As option sellers, high volatility is our friend.
Selling stock options in high volatility
One way to make money during market volatility is by selling options. When you sell an option, you’re giving someone the right to buy a security at a certain price. In exchange for this right, they pay you a premium.
If the price of the security doesn’t move as much as the buyer of the option expects, they may lose money. That’s where you come in. When volatility is high, you can sell options at a higher price than you would when volatility is low.
However, if the price of the security moves more than the buyer of the option expects, they make money, and you may lose money on the option contract. You may also be assigned the stock or forced to sell at a loss.
That’s why it’s important to have a sound options trading strategy before selling options during periods of high volatility.
High volatility option trading rules
Sell option premium versus buy
We typically like to sell as option premium versus buying. Selling premium allows us to collect premium month after month. By doing this we are acting as the insurance company or Casino versus those who buying premium. Buyers of options are playing the role of the gambler and keep in mind that the house typically wins in the end.
A few options trading strategies that can be used during periods of high volatility are selling puts, calls and strangles.
Close winners at 50-75% profit
When we have winners we want to close them and take them off the table. If we wait too long it can be hard to manage the risk and we could end up scratching a winner. We should look to close out a winner at 50-75% profit taking.
However, we should take into account time. We like to put on trades with 30-60 DTE days to expiration. If we have a 35 or30% winner in just a few days we should consider booking the trade and taking it off right away.
Roll losing trades at 15-21 days to expiration
Not all of our trades are going to be winners. Some will be losers. The key is to accept them and move on without having them bring down your whole portfolio.
If we have a 200% loser then I close it out and just move on. I don’t like to throw more money at a bad trade. It’s just a rule that I stick by.
For any other loser, I do a quick evaluation at about the ~21 DTE mark. As long as volatility is still fairly high and my thinking on the trade has not changed I look to roll out in time to the same price.
By rolling out to a new contract, you’re giving yourself more time for the price of the underlying security to move in your favor. You can also normally collect more premium. And if the price doesn’t move in your favor, you still have the option to roll out again. Very rarely does it take more than two or three rolls to break even and become profitable.
The key is to be able to track this. Here is an example of several successful rolls of TWTR on the Tastyworks trade platform. I’ll put a link down below and you can get a free offer when you open an account. It’s the best options trading platform out there right now.
You can see that we made over $3000 on this stock this year so far by closing and rolling to the next monthly option cycle.
The key to successful options trading is to have a sound strategy and to stick to it. By following a few simple rules, you can make money during periods of high volatility. By closing out winners as early and rolling at 15-21 DTE, you can collect additional premiums and give yourself more time for the market to move in your direction to be profitable.
Be sure and grab the FREE Simplified Options Strategies Trading Guide. I’ll put a link down below. It covers the different options strategies setups, how and when to put them on, max profits, and trade management. It’s a great guide to have by your side when trading options.
Thanks for reading!
What trades are you placing right now and why? Comment and let me know!
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