How can we benefit from the volatility in the market?
I've heard people say that there's more money to be made for traders when the market's volatile - how's that so? Can someone provide an example?
Answers
3086 points
EthanR answered 4 months ago …
Traders do better when there is volatility because the prices go to extremes, and then the traders can make more money riding the trend back the other way. It matters not whether the price goes up or down.
If a stock or ETF declines by 6% and the indicators are very oversold, a trader can play the bounce back 3-4%. But if the stock only declines by 1-2%, there is not as much room to trade back for a large gain.
1782 points
ChaosNantuko answered 4 months ago …
Ethan made a good point. to add to that, risk:reward ratios can be better in volatile markets. If you place your stop at the nearest area of support/resistance, and you only trade equities when they're near support or resistance, your amount of risk as a trader isn't significantly higher in a volatile market. However, your returns are higher because when it DOES move your way, it moves farther. Ergo: a traders market.
Even still, it depends on your time period and trading strategies. While many trading strategies will benefit, there are sure to be those that don't.
2633 points
MNSL answered 4 months ago …
I think all types of short-term market players will benefit from the volatility of the market.
Some players, speculators and brokers prefer volatility as they can get more income from the volatility. If you can identify trends in advance, you can make profit from the volatility.
Some investors use following strategies in the market of volatility.
Buying and selling options
Short selling
Buy when market oversold and sell when market overbought.
Trading futures
Other derivative instruments
Investors with less capital should learn to trade short term and medium term as well in the depressed, bear and volatility market. You will be safer if you follow strategy of buying stocks when market oversold and selling them when market overbought
148 points
KenTrester answered 4 months ago …
A simple strategy that requires relatively little capital is to buy options on high volatility stocks. With options, you have a limited amount of time to work with so the ideal plays are on volatile stocks. Generally, options traders who buy positions (as opposed to other strategies like spreads) make the most money during volatile periods.
I choose my options based on the likelihood that the underlying stocks will move 5% or more (in either direction) over a very limited three-week window. It's been the case that put options or covered calls are a great way to mitigate the impact of short-term volatility risk. It helps to think of options plays as a kind of inexpensive 'insurance policy'.They can provide a unique short-term profit opportunity, as well as the confidence to hold onto long stock positions for solid long-term gains.
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