Watch out for bulls as well...

Stock Market Volatility – How To Handle It

March 2 by Jitan Solanki

Those dreadful mood swings we’ve come to know as stock market volatility. How do you handle such a tricky little beast and profit from it?

Let’s face it, Wall Street is kinda bipolar. One minute it’s high and excited, the next it’s down in the dumps. A bit like your volatile ex-girlfriend.

Sometimes there’s volatility across the whole stock market, like when something batshit crazy happens (Trump, Brexit, I’m looking at you). Sometimes it’s just specific stocks, currencies or commodities.

And some stocks are more volatile – or bipolar – than others.

Take GoPro for example, which is like Britney Spears on the crazy-volatile scale. GoPro can swing as much as 10% higher on a good day. It can also come crashing down on a bad day.

So, volatility is bad, right?

Not always… When life gives you lemons – remember you can make some vodka lemons!

If you invest in GoPro at just the right moment, you can ride that 10% wave upwards and make a killing. Traders need volatility to move the price upwards.

It also depends what kind of trader you are. Traders who live on the edge – you know, the ones that scream at brokers and pound cocaine at lunchtime – love stock volatility.

Because if you trade volatility just right, you can cash in when the stock goes up and down.

Yep, you can make money when a stock goes down by “shorting” or betting against the share price. (Find out how you can easily take “short” positions with BUX.)

So, volatility gives us more opportunities to make money.

What about low volatility stocks?

In contrast, a stock with low volatility barely moves. Think of stocks like Pepsi.

They chug along slowly, growing or falling little by little, without swinging too wildly either way.

YAWN.

True, these stocks might seem boring, but they’re perfect for long-term investors. Stick your cash in a stock with low volatility, and you might become a millionaire… but it will take freaking ages.

On the other hand, you aren’t likely to lose your life savings either.

Volatility also equals risk

Like I said, GoPro stock is so volatile, it can lose 10% in a day. If you find yourself on the wrong side of a GoPro trade, it could drain your bank account faster than a stag weekend with Prince Harry.

Pepsi, on the other hand, would take a few months to lose that much value. Unless, of course, someone discovered that Pepsi employees were pissing in the bottles. That might crash the stock pretty fast.

But assuming that doesn’t happen, investing in low-volatility stocks means you’re relatively safe from big downside movements.

How to profit from volatility

If you are feeling like a pumped-up trader – a la Matthew McConaughey thumping his chest in Wolf of Wall Street – here’s how to trade volatility.

But, full disclosure, you might need balls of steel.

We know that GoPro swings high and low, right? So, the simple trick here is to buy GoPro stock when it dives low. You ride the wave up, and then you sell when it hits the top.

At this point, you “short” the stock and make money as it falls back down.

THAT SOUNDS SO EASY!

Unfortunately, it’s easier said than done. And if it were easy, we’d all be millionaires. But this is how volatility gives us more opportunities to make money.

But let’s say you haven’t done a line of coke for breakfast. Let’s say you’re not feeling so risky, and you just want to protect yourself from stock market volatility.

 

What do you do then?

How to hedge against volatility

Big political events in 2016 crashed the markets, and then threw them back up again. We live in volatile times, and it’s only natural to want to protect ourselves (or our money, at least) against them.

Good news is, you can do that too.

Introducing: the Volatility Index (VIX)

The simple explanation: The VIX is often called the “Fear” index, because it generally rises when the market is fearful.

The longer explanation: The VIX measures ‘options,’ or bets, on the stock market. When lots of traders are selling, the VIX rises. It means traders are getting nervous and anxious about stock market volatility. When lots of traders are buying, the VIX falls. It shows confidence in the market.

The VIX is considered ‘normal’ when it’s between 15-20. When it rises above 20, it means investors can be in for a bumpy ride. (It reached 80 during the 2008 financial crisis!)

If that sounds complicated, all you really need to know is this: When the US market goes DOWN, the VIX almost always goes UP.

It’s a seesaw.

So if you invest a little cash in the VIX, you will make money when the rest of the world goes batshit crazy. You are “hedging” your investment.

Capitalise on stock market volatility with BUX

The BUX app has a couple of handy tools to help you play with volatility. Most importantly, the “price alert.”

The price alert means you can set an alarm for when a stock hits a certain price. For example, if you think GoPro is going to shoot up when it reaches $9, the BUX app will buzz you when it gets there. Now you can trade GoPro at the perfect moment. Find out more about price alerts.

If you’ve got balls of steel…

… stock market volatility is your best friend. But, it can also steal your money. So if you’re not comfortable taking the risk, hedge the volatility.

Remember – always trade with caution!

Written by

Jitan Solanki

A self-certified trading junkie, he's not your typical heavy metal drummer and international traveller. But he loves to share his ideas and passion to all, no matter where he is in the world. He has a lot to share with over ten years experience trading stocks, commodities and foreign exchange. Connect with him on BUX: jitans

Disclaimer: All views, opinions or analysis expressed in articles are that of the author and do not represent the views of BUX. Neither BUX nor the author provide financial advice and these articles should not be construed as such.

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