This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

How You Can Profit From High Volatility

Stocks in this article: GME AMZN BKS

Editor's note: This was originally published in two parts on RealMoney. It is being republished as one article as a bonus for readers.

High-Volatility Investing, Part 1: Avoiding High Anxiety in Times of High Volatility

When the market resembles a jar of jumping beans, substituting call options can lower downside risk.

It is a familiar story these days. You have pretty demanding criteria for new positions, but you do some research and find a stock that meets them. Despite your care, the stock tanks.

When the market is making huge daily moves with little fresh information, investors need special tactics. In a series of articles, I am going to suggest ideas for dealing with high volatility and some stocks that fit the bill. The following strategy should be considered an alternative for any investment where you like the stock but recognize downside risk and high implied option volatility.

For our purposes, assume your candidate is undervalued (in both absolute terms and relative to the market) and exhibiting a lot of volatility -- making big swings in line with the major indices. For example, Caterpillar (CAT) has been a popular pick on the site and I like it a lot. The normalized earnings growth rate is good, the company is practicing cost containment and plenty of orders are already booked.

However, the trading range is difficult to determine. For Caterpillar believers, the recent price is already outside the range. When a sound bottom cannot be identified, it is more important than ever to address downside risk. In a market where some cyclical stocks trade at one or two times earnings, there is plenty of risk. Substituting call options for a stock can be a good method to limit downside risk.

To make the example easier to follow, I will start with the answer and review the process. The recommended position is the purchase of the Jan 30 call at a price of $8.70 and the sale of a Dec 40 call for $1.42. The prices given are all real at the time of writing, with the stock trading at $37.00. (By the time you read this, the exact prices will have changed, but the illustration is still valid.)

1 of 4

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,778.15 +421.28 2.43%
S&P 500 2,061.23 +48.34 2.40%
NASDAQ 4,748.3960 +104.0840 2.24%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs