Hands down, the absolute worst kind of volatility is zero volatility.
Not only does a “No Volatility / No Direction” – aka NVND – situation drive investors crazy as they wait for things to pick up… zero volatility will also cost traders money as time passes with no movement.
Take Fifth-Third Bancorp (Nasdaq:FITB), for example. In 2019, the banks were settling into what is normally a weak seasonal period. So, I recommended the purchase of a put on FITB and prepared for what my research told me was the inevitable – the stock was going to see a volatility storm and lower prices.
A month later, I’m watching the computer screen in aggravation after the stock had gone sideways on me.
It was going through NVND: a trader’s worst enemy.
Long story short, the lack of volatility cost me, as time premium – a major function of an option’s price – whittled away my investment and forced me to close a losing trade. Just because the stock went “NVND” on me.
[Volatility is a trader’s best friend – and Bitcoin is one of the most volatile assets in the market. But this smaller coin is “Bitcoin’s silver,” and it’s skyrocketed even higher than BTC this year.]
The other part of the story – and the more important part for today – is the right side of that chart. See, NVND is often followed by a volatility breakout. You just need to determine the directional move that’s coming.
In my FITB example, the stock traded fast and aggressively to the downside a month later.
NVND is bad for an open trade – but it can be used as an indicator for a future trade – one that lets you get in right before volatility explodes.
There are three stocks right now, in fact, that are experiencing NVND – and each is set for a breakout move…
How to Avoid the “No Volatility / No Direction” Black Hole
When I look for trade opportunities, I want volatility that’s fast, aggressive, and in the right direction. Typically, depending upon what’s going on in the market, fast and aggressive means big money.
Also, you heard me right, I want volatility that is “in the right direction.” Most investors have been trained to believe that volatility means prices will fall lower. You can’t blame them, that’s what they’ve been led to believe. That’s why so many investors forget that volatility isn’t just a function of lower prices.
No, volatility comes when a stock breaks into a bullish rally as well. Just look at the chart below of one of my favorite (and most successfully traded) stocks, Plug Power (PLUG).
In early January the stock shot 1,000% higher over a seven-day period. That move resulted in the volatility of PLUG shares increasing seven times. Put simply, that’s “Right Direction Volatility,” as my Night Trader subscribers were holding call options on the stock at the time. Yes, for those asking, if the stock had gone down 50% I would be calling it “wrong way volatility,” but it would have been volatility all the same.
My point here is that as a trader, you want to find volatility and harness it for all it’s worth.
And frankly, it’s worth a lot.
So how do I find the situations that I know are likely to result in a right direction volatility explosion?
Simple, I rely on math.
You can measure volatility in several ways, but the easiest is to calculate a stock’s standard deviation for a certain period. I won’t go too far into the math here, but knowing that stocks maintain a random distribution (you can apply their behavior to a standard Bell Curve) tells you that you are able to find periods where the price activity (volatility) is relatively high and low.
Knowing that is all you need to find the next potential volatility storm.
My database models scan more than 15,000 stocks each day to find those with volatility that have dropped to lower-than-average levels. Why? Well, the math suggests that these stocks must see an increase in volatility to come back to normal.
Put simply, a drop in volatility marks the “quiet before the storm.”
These stocks then become my volatility targets, and since volatility is my friend, they turn into stocks of interest for me to trade ahead of the expected volatility.
Enough Math, Let’s See a Few Tradable Examples
Coincidentally, PLUG is your first example of a stock ready for a breakout volatility move.
Like I mentioned earlier, it’s one of the most lucrative stocks that I trade, and it’s gearing up for another amazing profit opportunity.
After doubling in early January, the stock moved into a consolidation period. Frankly, this was a little surprising as a stock that doubles in that short of a period often retraces its rally by about 50% as traders take profits off the table by selling into the strength. That would have put the stock at around $50.
Instead, in a show of strength, the shares have traded in a “No Volatility / No Direction” pattern for the last month. Good news for someone like me that is seeking volatility, because that sideways activity is not normal for shares of PLUG.
Remembering that it’s all about the math tells me that PLUG shares are once again ready to return to a more normal volatility measure and that dip in the bottom right of the chart is all I needed to see to take action.
I already recommendation an option trade to my Night Trader
subscribers that may help them leverage that move. To learn how you can join them, give our VIP telesales team a call at 1-877-211-3024
Another name that finds itself on my volatility breakout list is Tesla (TSLA).
The electric vehicle company is almost like clockwork when it comes to its volatility storms, and they almost always take the stock higher.
TSLA shares went through the roof after they announced that the company would be joining the S&P 500 last year.
That rally carried the stock to the $900 level just ahead of the company’s last earnings report. Now, shares have been floating in the NVND pattern for the last month and a half.
We’re not likely to see another 50% run higher from the stock, but volatility should carry TSLA shares through the $900 level and higher.
Another example of right direction volatility is NVIDIA (NVDA
Chip giant NVIDIA has spent almost three months trading in a range that has dropped the volatility measures that I watch to levels that interested me in January.
This stock, which has been the leader of the semiconductors for some time, has also been dogged by the current shortage of semiconductor chips that has resulted from the COVID-19 pandemic.
Recently, the stock started to emerge from its volatility hibernation, which is signaling that another volatility rally is firing up.
A move above the $585 level will start to notch new highs and attract the attention of traders that have otherwise been put to sleep by the stock’s lack of movement since November.
Watch for NVDA shares to make their next charge higher as the semiconductor market starts to heat up again.
Now, the explosive volatility we expect to see from these stocks doesn’t even compare to what we’ve seen from the cryptocurrency market.
Bitcoin is sitting at an all-time high above $46,000 after a major investment from Tesla CEO, Elon Musk.
But this is just another stepping stone toward the highly-anticipated Digital Gold Rush.
With a single pick, you could take part in the profit potential of the burgeoning $7.1 trillion market.
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