Market Ju-Jitsu: Using Fear To Your Advantage

Did you know that you can quantitatively measure fear? In the stock market, volatility and uncertainty is often referred to as "fear" and is measured by an index called the VIX.

This week the VIX reached an all time high.

There is so much uncertainty and volatility in business right now that banks are even afraid to lend to each other because they're not certain that they will get their money back.

But there's still a way to make some money from the uncertainty by trading in options.

You use a strategy called a "credit spread".

This allows you to collect money from buying and selling option pairs that end up in a net "credit" to your account. You allow the options to expire "out of the money" and you get to keep the amount of the credit. The risk lies with the underlying value of the security you are buying options on. If the security goes "into the money" you will need to watch very closely to see if it will go back "out of the money" before the expiration date.

If that does not look likely, then you will need to "back out" of the trade before your broker comes along and asks you for the stock you sold options on.

That would be a bad thing!

Here's the video version:

Using Market Fear To Your Advantage