Well, Evolvers … The bear market continues…
The S&P 500 was down almost 3% on Tuesday in a brutal sell-off.
Big picture — the benchmark index is down more than 8% in the past month.
But if you’re attempting to trade this chop, don’t get ahead of yourself.
This kind of volatility can lead some traders to get over exuberant … which is a critical error.
I get it — trading a broad market dip can be tempting. With so many big % moves happening, you may feel a magnetic pull towards trading setups you shouldn’t be…
For traders with a negative bias (like me), these market conditions can be downright tantalizing.
But we must fight the urge to trade just because the market’s volatile. After all, volatility is a double-edged sword (more on that in a bit)..
I learned this in Tim Sykes’ Trading Challenge, and I’ll never forget it…
A volatile market doesn’t turn a subpar setup into an excellent one — but it can certainly fool newbie traders this way.
Bottom line: Volatility has its pros and its cons for options traders.
Let’s break them down…
The VIX Rips
One metric we can’t ignore during bear markets is the volatility index (VIX).
The VIX spiked 18% on Tuesday — up a whopping 58% in the past month.
But why should Evolvers care about the VIX?
Because heightened implied volatility (IV) makes buying options contracts more expensive.
In a wildly volatile market (like this one), you’ll need to risk more in upfront premium to execute your options trades.
This doesn’t mean options are untradeable — it just means you need to be selective.
Last week, I was looking at a few setups. But in hindsight, they were subpar. I’m glad I didn’t put on those trades.
Instead, I’m patiently waiting for the perfect setups to come around. I’m positive that, eventually, my discipline will be rewarded.
Follow my lead. Be brutally selective and disciplined. Make your timing count.
And most of all — be patient.
Obviously, expensive contracts is a negative aspect of broad market volatility.
But in other ways, volatility can be a good thing…
Volatility is a Double-Edged Sword
As traders, most of us love volatility. You’ve probably heard me talk about this during my webinars.
If you’re an experienced trader who knows how to capitalize on your strategy, you may view general volatility as a huge red bullseye.
And depending on your trading skills, this isn’t necessarily the wrong way to look at things…
After all, when big market shifts cause widespread portfolio rebalancing, HUGE trading setups can emerge out of the madness.
That being said, I often see newbie traders make the mistake of diving head-first into an ultra-volatile week of trading…
They hear other traders talk about the big opportunities waiting in the volatility. This leads some newbies to overestimate their abilities. They enter trades they aren’t prepared for.
In my opinion, this is a BIG mistake. If you’re a newbie, and the market is currently dipping, don’t try to hit a home run by shorting the market (or attempting to call a bottom and go long).
Want to be alerted to hot trade ideas before anywhere else?
Check out the alert for DWAC on October 21st:
This is a tool you’ll want in your trading toolbox.
Instead, I suggest newbies take this opportunity to sit on the sidelines and STUDY what’s happening.
Consider doing any of the following:
- Backtest previous trades.
- Compare and contrast potential future plays.
- Examine historical chart patterns (and think about how they relate to what’s going on currently).
Bottom line: When market anxiety is incredibly high, don’t try to be a hero…
It isn’t easy being a trader right now…
The market is unpredictable, volatility is elevated, and major indexes are down for the month…
If you aren’t 100% confident in your skills and plays in this market, I suggest you sit on the sidelines and STUDY!
Don’t feel like you have to trade the broad market volatility. There’s no shame in not trading.
REMEMBER: Trading opportunities are like buses — there’s always another one coming.