The situation between Russia and Ukraine continues to escalate… And as a result, we’re seeing a lot of volatility in the market.
During times like this, we can’t worry about if or when the market is going to bounce. After all, it’s not like we have a crystal ball.
So the best thing we can do is just keep trading, but trade according to what the market is giving us.
And in this type of environment, I like to use bull put or bear call spreads.
So today, I’m going to talk about how I determine when to use these strategies, and how I use them, with some examples.
So let’s dive in…
How to Trade Volatility: Bull Put and Bear Call Spreads
I start out by looking at the Tick Index. This is a short-term indicator that can help traders find a good window to place a trade. For bullish trades, we’re looking for ticks positive 800 levels, and negative 800 levels for bearish trades.
So as an example, let’s sell a bull put credit spread on the Invesco QQQ Trust Series 1 ETF (Nasdaq: QQQ). I could buy one put, sell another and collect some premium.
I could also sell bear call spreads on the Barclays iPath Series B S&P 500 VIX Short-Term Futures ETN (BATS: VXX). And once again… buy one, sell another and look to collect that premium.
The idea here is to use the heightened volatility we’re seeing to our advantage…
This strategy can also be used with stocks, particularly ones that are at the bottom of the barrel right now, like Netflix Inc. (Nasdaq: NFLX).
For example, I could buy the March 18, $315 strike put, and sell the March 18, $320 put.
Typically, you want to buy options when the volatility index is around 20 or below, and sell when it’s 20 or above. At the time of this video, it’s at 36… so in these examples I’m looking to sell.
As I said above, we can’t know what the market is going to do, especially with everything going on in the world right now.
Watch the video below for more details on what I look for in the markets, and how I use that information to determine how to trade.
P.S. Believe it or not, but the stock market’s stagnant 70% of the time… So time decay is eating away at options, and traders everywhere are paying for it!
It’s no surprise that the Chicago Mercantile Exchange says 76.5% of options expire worthless.
So when rare and large moves in the markets occur, people often watch their trading accounts get wiped out time and time again. It’s a frustrating whipsaw of action that demoralizes traders.
That’s why Joy of the Trade Head Trader Jeff Zananiri’s No. 1 goal is keep everyone away from this disappointing, costly process…
