Low Market Volatility Can Be Dangerous
We are currently experiencing low market volatility. You might feel like you can relax a bit, but don’t relax too much. This market condition can be dangerous.
I always pay attention to market volatility, as it allows me to track the movement and range of the market. When volatility is rising or sitting at a high level, it means traders are fearful. Markets start trading in a wide range as traders sell and head for the sidelines. This is often the worst time to leave, but fear of trading losses is a powerful emotion.
Don’t be complacent about low market volatility
When volatility sits at low levels for an extended period of time, it means that investors and traders are complacent about risk. They are not worried about a market retreat. As the days wear on and weeks become months, you may have difficulty believing a downturn could ever happen.
THIS is the belief that worries me, and it should worry you, too. When everyone stays on one side of the boat, it eventually tips over. When volatility is low for a long period of time, that is the case. It is dangerous and simply ridiculous to believe there won’t be a corrective period coming. And as we all know, a correction often hits without warning.
Protect your portfolio!
What can you do to protect yourself? Pay attention!
If low market volatility hangs around for more than a few weeks, buy put protection, sell winners, and hold onto cash. If you reduce your exposure, you’ll be in the lifeboat when others are looking for the exit doors.
But even more important, you won’t miss out on profits when the markets turn back up. If you cut and run too soon, you’ll have to watch as those names turn back up and go higher. It’ll likely cost you a lot more money to get back into the game.
Bob Lang is a top technical analyst and expert options trader who teaches people how to successfully trade options for income. He is a sought-after mentor and teacher, published author, go-to chartist for Jim Cramer and popular speaker at industry conferences and tradeshows. This post originally appeared on the Explosive Options website.