Tastylive: How I use Market Fear to My Advantage

Markets are in fear mode right now. That’s creating opportunities for investors and traders alike. Investors can buy great companies at a discount to their recent highs. That can mean buying a lower earnings multiple. Or, getting a higher starting dividend yield on income-paying stocks.

Traders have some advantages here as well. Market volatility is high. Big daily swings can be used to generate bigger profits. Or, the same profits with less capital than during calm periods.

Higher market volatility changes many variables in the options market. Changes in strike distances can lead to a bigger skew. This is where there’s a pricing mismatch between puts and calls.

For instance, a stock that’s been heavily hit in a market selloff may have a high skew in the put options. But buying the call options could mean a better bargain, especially if the stock rebounds.

Another factor is strike distance. That takes advantage of traders with a longer-term time horizon than short-term traders.

Rising market volatility tends to calm back down over time.

Traders who sell options when volatility is high can often profit as volatility declines. That’s true even if the underlying stock doesn’t make a significant move in either direction.

Market fears come and go. Fortunately, they can create more lucrative trading environments for those who know hose to take advantage of them.

To see the full impacts of skew and strike distance in volatile markets, click here.