Day Trading: How to Take Advantage of Record Highs in Volatility

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Spring of 2020 will probably go down as one of the most volatile periods ever in financial market history. And those who know how to ride volatility trends can make an absolute killing at such times.

We’re only a few weeks into this bear market, but the main measure of volatility, the VIX index, is already near 2008 crisis levels. But what’s taken most people by surprise is the speed at which this spike has risen.

So what is volatility?

Volatility is defined as the variation of a price over a period of time. If you look at any chart you’ll see that volatility is present in most financial markets, forex included.

The VIX volatility index and it's uses
The VIX volatility index and it's uses © forexop

There are ways that traders can make use of this effect and indeed profit from it.

Day traders should understand that news of the day greatly affects both pricing and volume, and should be used when setting up daily strategies and when pulling the trigger – both in buying and selling.

The CBOE Volatility index is an excellent play for many day traders in this climate given that Black Swan events like the coronavirus pandemic.

The VIX, which measures implied volatilities in S&P 500 options contracts is often seen as a broad based predictor of the market’s risk appetite. Sometimes called the “fear gauge”, an increasing VIX indicates risk aversion and less demand for high yielding currencies.

VIX chart
VIX chart © forexop

A falling VIX means increasing demand for risky assets – generally this a forward indicator of “dollar weakness” (see long term VIX chart).

VIX has shown a bit of restraint lately as charts and volume suggest, but as this index has been pushed down into the low 20’s and even high teens, it is coiled and ready for a push upward. The VIX can push upwards of 10%-20% in one day, making it one of the best day trades out there if one knows how to trade the news.

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Oil: As oil continues in a bear market trend, the VIX can be used as a hold play for day traders and those with short to medium buy and hold strategies.

Selling options: Options can be another great play on volatility, especially on the sell side. Options are priced significantly higher when volatility increases. Selling options at a peak is therefore a way of shorting volatility.

If you missed the first big move, buy side put options can be used to profit when bull trap rallies collapse. This strategy does require careful timing and certainly isn’t for novices.

Precious metals and cryptos
Metals and cryptos represent interesting alternatives at this time. Traditionally a safe haven, gold and especially silver has been punished, and has seen some big downwards legs during this bear market. Though much of this can be attributed to technical factors such as margin calls and a need for liquidity.

Cryptocurrency markets and bitcoin in particular has seen a drop roughly in line with equity markets. And the bear market has just exacerbated already high volatility in the altcoin space.

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