Many retail traders are naturally scared of trading volatile stocks. There have been so many instances in the past when extreme market volatility simply took many to the cleaners and many are still dipping their hands in cold water after getting them burnt severally. However, there are a few occasions when trading volatile stocks might be a good idea.
Of all possible strategies you will hear on trading volatile stocks, the one which stands out may be the selling of vanilla options.
Why Selling Options on Volatile Stocks?
What does it mean when we say a stock is volatile? It means that there are wild swings of price action and there is no definable trend. Price action is very choppy and unpredictable. For instance, the Dow plunged 1000 points on market open on Black Monday of August 24, 2015, only for it to gain it all back and eventually track down again to close the day more than 520 points lower. If a trader were to attempt trading this asset even with pending orders, it is more than possible that losses may have followed.
If you look closely at today’s markets, it will become obvious that volatility is far from being over. The FOMC meeting that took place in the 3rd week of September to determine if US interest rates should be increased showed that volatility can occur regardless of which direction the decision takes.
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