Volatile market conditions seem to scare a lot of market participants. However, a trader is what dreams are made of. Whether it’s day trading or swing trading. As long you’re not a long term investor, you run towards volatility. There is an opportunity for investors to get into this market as well and earn a high yield! Keep reading and find out how the 2020 Financial crisis or market crash can supply you with opportunity through volatility.
These volatile conditions have recently surfaced, from the end of February 2020 to early March the world has gone in pandemic mode. The Coronavirus has spread and businesses, borders and more are shut down. Putting downside pressure on supply chains, markets, and the Federal Reserve, among other several central banks to provide stimulus. And so the volatile conditions were born.
These volatile conditions bring opportunity on all fronts. We’ll talk about how the VIX has been affected. The opportunity for day traders, swing traders, and investors in these market conditions.
The VIX is a volatility index based on the uncertainty of the S&P 500, a derivation of the indices volatility. It is not represented in a monetary asset movement. Rather than a figure.
Take a look at the VIX chart below. The VIX represents the volatility in the S&P 500 and the uncertainty. Generally spiking when markets are falling fast. The fast market movement suggests activity in the VIX. Since late 2018 the VIX has been subdued due to a slow grind to the upside with some sporadic jolts rarely. Never passing above the 40 levels.
The VIX index has usually stayed between 10 and 12, indicating periods of volatility. In the case of the 2008-09 market crash and financial crisis, we saw an all-time high of 96.40 and the VIX has never been at that level again.
In recent ventures, we’ve just nearly missed that all-time high level. Hitting just over 84 in recent days. From this spiked volatility, markets have been noisy and presented traders with a lot of opportunities. The VIX chart represents general market participant fear as well, which is not the best for long term investors, however, it does present future opportunities.
Day Trading Volatile Markets
Day trading is a very short term aspect of trading. The idea is that traders close their positions before the day ends. Sometimes trades happen in seconds, which could be scalped. In these volatile market conditions even longer day trade positions happen within seconds.
These long extended moves of volatility that can move futures markets 10s of points in under a minute are very opportunistic. The futures market presents day traders with a reliable asset to trade with centralized volume for order flow use and other reliable tools. Usually, margins are low but in this increased volatility it’s not uncommon to see brokers increase the margins by even 3 times.
The futures market volatility is of high risk, that is why we use stops and sometimes widen them in these circumstances. Below is a chart of the S&P 500 on a 10-tick range. This chart is not subject to time so this full chart of movement represents 40 minutes of price movement. From left to right. The bottom of the price shown on this chart is at 2460 and the top in 2518. This is nearly 60 points of movement or $3000 of potential opportunity on 1 contract on the S&P 500 E-mini futures. Naturally, we won’t capture the whole move from top to bottom. There are a lot of moves to catch from broken highs and broken lows. Even a 5 point move, on 1 contract is $250 and it happens in seconds!
When it comes to swing trading in these volatile market conditions. We lean towards the options market. There is a lot of leverage in the options market and the premium increase with volatility.
Selling premium in this market environment is very risky, so that is not recommended. However directional moves based on technical analysis are proven to be very profitable. Trading assets on options like the SPY index ETF and the VIX stock options are options trader favorites. A lot of ETFs in the options world are popular. Options chains and premiums may not be favorable for buyers but these huge volatility moves to present the option of different options combinations.
Looking at strangles and straddles lets you take advantage of spikes in volatility without having to choose a direction.
When it comes to investors, looking to buy stock for the long term seems to be out of the questions. Investors don’t want to catch the falling knife by any means. However, some may look into inverse ETFs. Those are the braver investors in these market conditions.
Otherwise, cash is king and investors will get the chance to start buying equity when a bottom approaches. When and where will it bottom? No one knows with accuracy. And unfortunately, you will never catch the bottom however you can identify when the market starts to stabilize and starts to rally you can get on board. As long as you stay in cash and wait for that opportunity.
Some investors incrementally buy the knife every 10% drop which places a stronger average cost base position in their favor. Otherwise, waiting for conditions to turn is the big money investors.
What would need to happen in this case? Coronavirus cases need to slow down. Businesses have to start operating again, country borders have to reopen and global supply chains have to come back in full force. The Fed’s quantitative easing approach and low rates can only help so much. They may even start announcing stock share purchasing.
If the S&P 500 starts to show signs of strength and starts to bottom with higher lows and higher highs we may see a slight rally shape up. What has to happen for that? We need to see the S&P 500 futures market start to bounce off the 2350 area, not breaking below and rally and close a week above 2700.
Until then, all we can do is endure this volatility in quarantine and watch the VIX chart to see if fear subsides.
We do this every day in our day trading room as we watch the S&P 500 futures market for the opportunity and long term opportunity potentially arising.
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The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable for your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.