Volatility is NOT Risk

Last week culminated in a nearly 1,000-point loss on the Dow on Friday. It was also the third week in a row that the S&P 500 lost at least 1%.

Among the reasons for last week’s selling were the prospect of a half-percentage point interest rate hike in May and downbeat earnings reports from retailers and health care companies. 

I can understand why some of you may be nervous by the market’s recent gyrations. However, it’s important that traders, specifically option sellers, don’t confuse volatility with risk.

Repeat after me: Volatility is NOT risk. 

Volatility is found in the short-term movements of a stock. Risk is found in the longer-term performance of a company and valuation of a stock.

As an option seller, you can use volatility to your advantage, as higher volatility translates into higher option prices. 

This requires that you think longer term like an investor (i.e., selecting solid stocks to trade) while trading shorter term for cash. 

That’s exactly what we do at Options Income Blueprint. Last week, we closed two winners on volatile stocks, booking $90 in cash and earning excellent rates of return.