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High Volatilty Market

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PostPosted: Sat Dec 25, 2004 11:11 am    Post subject: High Volatilty Market Reply with quote

A high volatility market is an easy trading market (i.e. a forgiving market), where large gains can be made quickly. It's somewhat of a paradox. However, a high volatility market (volatility is a measure of risk) is also a safe trading market (since cash is at risk for shorter periods of time). I'll use some real examples of my trading performance in a high volatility market.

In Aug and Sep 1998, the market had a major correction, and then became increasingly volatile, near the bottom, in late Sep to late Oct. I would buy roughly $1,000 of GE Nov calls, on dips, and sell them for roughly $1,500, on bounces, normally within one day. I traded GE calls perhaps every other day and made large gains over 90% of the time. About 10% of the time, I'd take a small loss or basically receive my money back. GE moved very closely with the general market, which was very volatile.

In late 1998, everytime CHV (Chevron, an oil stock that merged with Texaco) fell below 80, I bought calls, and then it bounced above 80 each time, to sell the calls. I would make several hundred dollars on each trade, perhaps three times a week for two months.

There was a stock called AtHome (ATHM). I recall buying $1,000 of calls, selling them for $5,000 within two hours, then using $1,000 to buy farther out-of-the money calls, and selling them for $5,000, all in one day.

When the Dow Industrials fell sharply one Fall, I started buying DIA Jan calls. I was told by one person that I was taking a big risk and should wait until the market bottomed. However, I knew there would be enough volatility to trade even if it weren't the bottom. I made very large gains, even though I sold most the the calls way too soon.

There were also excellent put trading opportunities. When the market was volatile, I would buy OEX next month puts, and several times, the market would gap down at the open, the following day, and I would sell the puts for 50% to 200% gains.

In a high volatility market, cash is often at risk for a short period of time. If options were bought too soon, then the volatility will often allow you to recover most or all of your money. Moreover, many stocks moved more predicatably and by greater amounts, to lock in gains faster. I estimate, I made roughly 90% of my gains purely on volatility (e.g. a quick trading range) rather than predicting direction.
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