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Volatility can be scary, it can make you feel like you understand nothing about the market and it can make you feel like the market is positively bipolar, Jim Cramer told viewers of his "Mad Money" show Monday.
it is time to stop worrying and learn to love the volatility and make money off of it," Cramer said.
In his two-step plan to profit off of volatility, Cramer said first you must understand the market and then learn to trade off of it.
"The number one reason getting in your way of making money is lack of understanding volatility, he said. "You get volatility when the market cannot process supply and demand correctly."
When there is no volatility, buyers and sellers are in equilibrium. But this is not the state we are currently in, Cramer said. "Our equilibrium has been destroyed," he said.
The first source of volatility, Cramer explained, is that brokers don't position any more. Positioning is when hedge funds don't dump stock, but instead sell stocks slowly.
"This prevented volatility," Cramer said. But brokers have stopped positioning because it has become less profitable. "Commission is too low and interest rates are too high," Cramer said.
The second reason the market goes up and down really fast is because of new exchange-traded funds (ETFs). They move much faster than individual stocks, so when you buy or sell ETFs, the stocks in them either get crushed or lifted with a crane, Cramer said.
The third cause of volatility is hedge funds, which buy and sell stocks quickly, Cramer said.
"Hedge funds are pushing stocks up and down," he told his viewers. "You are at the mercy of mutual funds, pension funds and hedge fund accounts."
"If there's one thing I'm good at, it's trading," said Cramer.
First, pick a stock that you really like, he said.
To show his viewers how to play the volatility game, Cramer picked
"OXY is the least hedged of all the oils," Cramer said. "It's in the prime position for volatility."
When you're looking for a company that has volatility, Cramer warned, it should not be a bad company.
After you pick a company, take an opinion, he said.
"Opinions matter to make money," Cramer said. "Act on your opinion based on your convictions."
Taking his example of OXY, Cramer said if you have 300 shares of it, drop 50 shares every time it jumps 3%, and when it goes down, buy it back.
"Treat trading like a dance," he said. "When the stock goes up, sell a little and when it goes down, buy a little."
Buy and sell your stock in increments because small trades equal big payoffs, he said.
The bottom line is you can make money off of a volatile company if your trading strategy includes core positioning, Cramer said. "Take my rules and apply them to yourself."
, which he owns for his
Action Alerts PLUS charitable trust, as two examples of companies with core positions.
Dynegy Ready to Shine?
Cramer recommended buying
, an operator of power plants and a player in natural gas liquids business.
"DYN belongs higher," Cramer said, speculating that the company is looking to sell itself.
The company is a pure-play operator of power-generating coal- and gas-based power. It has cleaned up its balance sheet and has gotten rid of all of its senior management, except its CEO, Cramer said.
A Crystallex View
In a phone interview with Todd Bruce, the president and CEO of
, Cramer asked how close the company was in starting to get gold out of its mine in Venezuela.
"We are in the hands of the ministry of the environment," Bruce said. "We are in the final administrative state in having the permit issued."
But didn't Crystallex believe that two to three months ago, Cramer asked.
Crystallex felt this way as soon as the ministry of basic industries in mining had given their approval -- that was toward the end of March. Now the company is waiting for the ministry of the environment to grant its approval, Bruce responded.
If the company gets approval tomorrow, how long before the machines start going and Crystallex starts excavating ore from the ground, Cramer asked.
"We would be able to start moving machines in-country very quickly," Bruce said. We are waiting with the entire mining fleet in Houston to ship it, he said.
But viewers are skeptical, Cramer said. Why would President Hugo Chavez allow a profit-making company to come into Venezuela?
"Because a large part of the mining industry is based there," Bruce said. There are many companies, including Crystallex, that already operate mines there, he said. It's basically just more of the same.
To view Cramer's interview with Bruce, click here.
Cramer was bullish on
Las Vegas Sands
International Game Technology
Freeport-McMoRan Copper & Gold
Cramer was bearish on
Home Solutions of America
Clear Channel Communications
For more of Cramer's insights during the most recent Lightning Round, click here.
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At the time of publication, Cramer was long Sears Holdings and Schering-Plough.
Jim Cramer, host of the CNBC television program "Mad Money," is a Markets Commentator for TheStreet.com, Inc., and CNBC, and a director and co-founder of TheStreet.com. All opinions expressed by Mr. Cramer on Mad Money are his own and do not reflect the opinions of TheStreet.com or its affiliates, or CNBC, NBC UNIVERSAL or their parent company or affiliates. Mr. Cramer's opinions are based upon information he considers to be reliable, but neither TheStreet.com, nor CNBC, nor either of their affiliates and/or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. Mr. Cramer's statements are based on his opinions at the time statements are made, and are subject to change without notice. No part of Mr. Cramer's compensation from CNBC or TheStreet.com is related to the specific opinions expressed by him on "Mad Money."
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