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Editor's Note: Given the extreme volatility in the market right now…TheoTrade is extending its market coverage for our daily readers. Catch Garrett Baldwin live today at 12:30 PM ET. |
It's 100% free to attend. |
Click here to join the live session |
—- Don Kaufman, Co-Founder at TheoTrade |
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Don Kaufman here. |
Markets are moving fast, volatility is through the roof, and you're probably wondering, "What the heck do I do now?" Don't worry—I've got you covered. |
This isn't my first rodeo, and today, I'm going to walk you through how to keep your cool, manage risk, and maybe even find some incredible opportunities in this wild trading environment. |
Let's dive in. |
Why Volatility is Your Friend (Even When It Feels Like Your Enemy) |
First things first: volatility is not the enemy. I know it feels like the market is out to get you, but trust me, this is the kind of environment where seasoned traders thrive. When the VIX is hitting 50, 60, or higher, it's essentially a sign that the market is screaming: "We're scared!" |
Here's the thing about fear: it inflates options prices like a balloon. And when implied volatility is this high, selling premium becomes incredibly lucrative. |
I'm talking about selling put spreads way out of the money and collecting premiums that you'd normally only dream about. |
But before you go selling every put you can find, let me hit the brakes. Volatility cuts both ways. You've got to manage your risk carefully, or the market will eat you alive. |
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Step One: Put on the Helmet and Assess Your Risk |
When the market is falling apart, the first instinct for most traders is panic. You see positions going red, bid-ask spreads blowing out, and your heart rate starts to match the VIX. But here's the truth: panic is your worst enemy in a market like this. |
What do you do instead? You slow down. |
Take a deep breath and assess your positions. What's your delta? Where's your risk concentrated? Are you overleveraged? Answer those questions first. If you're in a trade like the Christmas tree spread (or anything complex), this is NOT the time to start closing it out just because you're scared. The market is too chaotic, and the bid-ask spreads are insane. Let the trade come to you. |
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Why You Should Let the Trade Come to You |
One of the biggest mistakes traders make in high-volatility environments is trying to force trades. Look, I get it—you want to act. But here's the thing: the market doesn't care about your feelings. |
If you try to close a position right after the open or during peak volatility, you're playing right into the market maker's hands. |
Take the Costco trade I mentioned earlier. It was deep in the money, and we were targeting a 55% gain. The key to success there? Patience. We didn't chase the market; we let it stabilize, worked our orders, and got out with a profit. |
The same applies to all your positions. |
Whether you're managing a hedge or trying to close a profitable trade, wait for the market to mellow out. Volatility will contract, spreads will tighten, and you'll get much better execution. |
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Capitulation 101: What It Looks Like and Why It Matters |
Let's talk about capitulation. This word gets thrown around a lot, but what does it actually mean? Capitulation is when traders collectively throw in the towel. It's that moment when fear peaks, selling accelerates, and everyone says, "I'm out." |
How do you know when it's happening? You'll see: |
Advanced-Decline Lines completely in the gutter. Bid-Ask Spreads breaking down or even inverting. Platforms Struggling: When tech starts to fail (like Thinkorswim freezing up), you know it's getting real.
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Here's the kicker: capitulation is often the precursor to a bottom. It doesn't mean the market will immediately turn around, but it's a sign that we're closer to the end of the sell-off than the beginning. |
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The Art of Selling Premium in a Crisis |
This is where the magic happens. When fear is at its peak, options premiums go through the roof. Let me give you an example: |
On Friday, I sold puts at the 320 strike in SPY for $3. That's right—three bucks for something so far out of the money, it feels like it's in another galaxy. Why would anyone pay that? Because fear makes people do crazy things, and as a premium seller, you can capitalize on that. |
But—and this is a big BUT—you've got to size your trades appropriately. |
Don't go all-in just because the premiums look juicy. You're not here to pick the bottom; you're here to sell fear and manage your risk like a pro. |
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When to Hedge and When to Sit Tight |
Hedging is an art, especially in a market like this. If you're in a trade that's taking heat—like the Christmas tree spread I mentioned earlier—you might be tempted to hedge immediately. Don't. |
Why? Because in the middle of extreme volatility, hedging can actually lock in losses. The cost of the hedge might be so high that it's not worth it. Instead, wait for the market to stabilize, and then assess your options. |
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The Opportunity of a Decade |
Let me leave you with this: markets like this don't come around often. The last time we saw volatility like this was during major financial crises. It's scary, yes, but it's also packed with opportunity. |
The key is staying calm, managing your risk, and positioning yourself for the eventual recovery. Whether it's selling premium, hedging smartly, or simply surviving the storm with your portfolio intact, the choices you make now will define your trading success for years to come. |
So, buckle up, stay disciplined, and remember: the market rewards those who can keep their heads when everyone else is losing theirs. |
As always, trade small, trade often, and stay sharp out there. Let's crush it. |
To your success, |
Don Kaufman |
P.S. Garrett Baldwin will be live at 11:30 AM ET to cover the latest market action. Click here to join him. |
P.P.S. If you haven't heard, Garrett will be live every market day, starting at 8:45 AM ET, make sure you're signed up. |
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