Happy Australia day. Our offices are closed for the public holiday so I recorded this market update on Friday. I thought it would be a good idea to outline a possible option strategy for gaining exposure to any upcoming volatility. It is not a trade recommendation, but instead a case study in how to pick targets and how to work your way into a cheap straddle and then benefit from volatility in both directions.
With US markets bouncing back so hard from the scare in December I have a feeling we are getting fairly close to a sharp sell-off even if we are heading higher over the next few months. A good way to play it is with options because you can control your downside dollars at risk (you can only lose the cost of the option), and you can trade around the position and create various payoff diagrams that concur with your view.
I show you in this video where I think the selling pressure should emerge in the S&P 500 and where I think the market can get to on any sell-off in the short-term.
I then suggest an option strategy based on the technical set-up, which has a goal of creating a cheap straddle at a point where there could be either a large bounce or a continuation of the sell-off. In other words, its aim is to benefit from volatility in both directions.
If there’s anything we can count on, it’s that the market has entered a phase of higher volatility, so looking for strategies that can benefit in such an environment is the way to go.
Editor, Alpha Wave Trader
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