Although the CBOE Market Volatility Index (VIX) hit multi-year lows last week, make no mistake: Market volatility will be on the rise from here on out.
Remember this chart? This shows you exactly why I’ve been pointing out that the stock market “might not get off the rollercoaster ride anytime soon.” Not in an election year:
It’s a stark reminder that, despite recent lows, VIX has historically spiked higher by about 25% on average leading up to Election Day. So, you had better buckle up!
VIX measures the implied volatility of call and put options on the S&P 500 Index. But there are plenty of other measures that also signal market instability is on the rise. Measuring extreme price movements, for instance, is one tried-and-true way.
Recently, the tech-centric Nasdaq Composite Index made a four-standard-deviation move from extremely oversold to extremely overbought – in just 17 trading days!
For those of you not statistically inclined, two standard deviations should include about 95% of price movements around the average. So, as you can see above, Nasdaq just made an improbable move in both directions – down then up again – all in less than four weeks.
In fact, moves like this happened just 15 times in the 53-year history of the Nasdaq. The last time, in October-November 2023, came on the heels of a 13% drop in the Nasdaq.
Following similar volatile swings in the past, the Nasdaq tended to struggle over the next three months, moving higher just 50% of the time. The good news is that stocks consistently gained ground over the following year: 69% of the time, with an average gain of 15.6%.
This pattern fits perfectly with my expectation for more volatility to come leading up to the election.
Our own Trade Cycles Seasonality patterns agree:
If you have access to Trade Cycles, you can find this Seasonality chart from the TradeSmith Finance homepage, clicking on the S&P 500 tile, and clicking the Trade Cycles tab. If not, you can simply call us at 888-623-0858 and we can help you decide if Trade Cycles is right for you.
As you can see above, the period from the end of May to early October predicts one big rollercoaster ride of ups and downs in the stock market. That’s been the case historically, and this year’s election is bound to be more contentious than usual.
The good news is that the S&P 500 should then experience a typical post-election rally into year-end. Keep your fingers crossed.
In the meantime, remember that for every storm cloud of market volatility, there’s also a silver lining. And that’s a way to profit directly from higher volatility – as a seller of call or, even better, put options.
After all, when volatility is on the rise, so too is the premium income you can earn on every option contract you sell. And the best way to find these quick profit opportunities is with TradeSmith’s proprietary options tool.
How to Quickly Find Income-Producing Trades with Options360
Simply log in to TradeSmith Finance and, if you’re already an Options360 member, from the main menu click on Options, and then Opportunities in the menu bar below.
Next, under All Strategies you can select from multiple Options360 pre-built strategies, as you can see above. For now, let’s focus on Sell Puts. That will bring you to a page that’s brimming with quick income-generating trade ideas.
When I visited this page yesterday, I found 14 results, but due to limited space here are the top three in terms of maximum profit potential.
Let’s take Charter Communications (CHTR) in the center. All the information you need to evaluate the trade is laid out on the above tile. Here are the key stats explained.
- Listed at the top is the trade to place, which you can either enter online or literally read to your broker.
- Your Max Profit, or “premium,” for selling this put option is $60 per contract. Each contract is worth 100 shares, so that equates to $0.60 per share.
- The Probability of Profit is 89%, high odds that this option will expire out of the money and you’ll get to keep your $60 premium.
- Using a typical margin account, the buying power required to place the trade is $2,360. So, that $60 works out to a Return on Investment (ROI) of 2.54%.
And keep in mind, this is an option that expires in less than a month. If the option is in the money at expiration, you could be assigned CHTR shares (100 shares for each option sold). That would amount to $22,940 to buy the underlying 100 shares. You can see why we choose options that are most likely to expire out of the money, i.e. at 80% to 90% Probability of Profit.
And be sure to click on Trade Summary at the bottom right to get even more details.
In addition to daily option opportunities, with Options360 you can also screen for your own Sell Put opportunities using our Options Screener tool with any filters you desire.
Again click on Options from the main menu, then Options Screener from the menu bar, and + Create new screener.
That will take you to our state-of-the-art options screener page shown below. Here, you’ll find dozens of filters you can choose from, grouped by Underlying Asset Filters and Option Filters:
Simply click on + Manage Filters at top-right and you’ll find our proprietary TradeSmith indicators: Health Status, Trend, Rating, Seasonality, and more. Under General filters you can choose specific markets, sectors, asset type, and more. Plus, you’ll see filters for fundamental data and performance, as well.
Then scroll down to Option Filters and you’ll see Probability of Profit, ROI, volatility filters, and more.
Above is a screenshot of our available filters for the Underlying Asset (top) and Options (bottom) screeners. Plus, our software developers are constantly adding new filters nearly every other week!
Mike Burnick’s Bottom Line: When markets turn volatile, as they’re likely to between now and Election Day, our Options360 Opportunities and Screener tools can help you cash in. You can quickly identify dozens of potential sell put, sell call, and buy-write covered call trade setups to earn steady, repeatable income from the option premiums you’ll earn.
Good investing,
Mike Burnick
Senior Analyst, TradeSmith