Downside Volatility Can Pay Well

options scalper

Downside Volatility Can Pay Well


Not to belabor the point of late…but…the market continues to both giveth and taketh away. The name of the game recently in the SPY ETF has been the $400 level. After the dip to $385 and change and the reclamation of $400, can traders have confidence that it will hold that psychological level? Monday reclaimed it and spent most of the trading session above it. Tuesday premarket had a gap-up that–following a 90-minute dip–resulted in a gap-and-go. Some hope began to seep back into the market as it closed above $408. Some were even discussing $410 in muted tones of hopefulness. And then Wednesday dawned bright and red with a massive trending day back to close at $390.55. Midweek, traders were reminded that the bear still prowls. This week has had wild news including Melvin Capital calling it quits, Sri Lanka defaulting on its foreign debt, and Elon Musk tweeting overtly political material. Thursday was a day trader’s dream full of range but ultimately relatively on balance from open to close (minus said swings), and Friday pre-market instilled hope in some as it slowly climbed overnight and into the morning. Nonetheless, Friday opened and morphed into a massive trend day setting a new 52-week low on the SPY ETF at $380.54 and then rallying up to close just below $390. What a wild week.


One of the things that traders in our community have come to enjoy and profit from is intraday trading range. This week has featured a lot of range, and that can be exploited both to the downside and up. One thing that is continually overlooked by new traders is the fact that options traders can make money as easily to the downside in bear markets as they can to the upside in bull markets. There is, essentially, no difference to the mechanics and elements of placing a call option trade and a put option trade. There is, of course, the requirement to shift your thinking to a differently oriented chart. Red is good when one is in a put trade, after all. So that can, admittedly, be jarring and odd for new traders. However, it is a very short-lived awkwardness. Once an options trader is adjusted to the inverse paradigm, there is no difference in charting.

A good instance of a strong put option trading day was Wednesday, May 18th. The SPY ETF was, quite frankly, a gift that day to put option buyers (and call sellers, for that matter). That day was a massive down-trending day with SPY opening around $403 and closing near $391. Along the way, it simply plowed through support after support with technical relief bounces along the way. There was simply massive profit opportunity after opportunity throughout the entire day.


I know there are some traders who have difficulty being anything other than long biased. However, as mentioned several times on this blog (and many, many times in our various trading rooms by our moderators), if you don’t take the time to learn, and become comfortable with, playing the market to the downside you are missing out on 50% of the available money-making opportunities the market affords us. And while everyone is looking for a bottom, the truth of the matter is that even if the S&P 500 might be giving some people some hope, we are nowhere near out of the woods yet.

Be patient. Be observant. Be comfortable playing puts.