Volatility is money

I have been warning for high volatility for quite some time and have said that when panic hits, it often comes sudden and fast without prior warning. Long time ago, I even wrote a blog "Fear of no fear", meaning when no one is fearful of any risk, you really should be fearful. I was laughed at by consistently talking about risks when the market was red hot and kept going up. But I hope the passing week of nearly 50% jump of the volatility with panicky selloffs has given the FOMOs a good dose of lesson why it is important to always be mindful of the potential risks out there. There is simply no such things as no risk bull market straight line up. Keep this in mind!!

I was asked what the coronavirus crisis will do to the market. First of all, I really hope this health crisis in China can be contained soon and more people's life can be saved. While natural disaster is not predictable and cannot be completely avoided, unfortunately this crisis has a lot man-made components involved. Virtually each earlier steps to effectively control the crisis were missed. God helps China and Chinese people!!

 

For this question, a short answer is a lot of impact and no impact at all! It really all depends on what the timeframe we are talking about. Let me explain.

In a short run, namely a few months probably, the market will be very volatile and swings a lot due to the presumed grave risk from the widespread coronavirus. Two major factors will propel the volatility:

• Lack of transparency of the true situation from China will potentially enhance the uncertainty and makes a lot of surprises along the way. This is what the market hates. So be prepared for such kind of swings.
• Exaggerated headlines scares will intensify the panicky reactions. No need to say the media is by nature to exaggerate situations for almost everything to scare people. That's how they can attract eyeballs and therefore make more money. 

However, in the long run, this kind of crisis will dissipate eventually and soon after, no one will remember it anymore. The market has a very short memory and becomes increasingly shorter. Think about SARS crisis about 15 years ago. The market declined about 10% or so initially but a few months later, it shot up more than what it had lost. Any persistent impact we have seen now from the SARS crisis. None!! Mark my words, this crisis will passes eventually without much trace for the market. Anyone telling you that this will likely be an end of world moment with persistent damage to the market is bluntly a liar. Don't believe a bit!! 

So the bottom line: Be careful about the short term volatility but take advantage the short term panic to trade for good TA setups and also add long term DRIP stocks when good stocks are on sales. This is what I'm doing these days. Actually I have shared with my Family multiple weekly income trades, all closed with 100% gains except one that I closed for 50% gain within the same day. This is the time to use volatility to your advantage if you know how to and safely make some quick money. For next week, barring major worsening of the situation over the weekend, I think the panic today has priced in a lot of the downside risk and I think we are very close, if not yet, to the very short term bottom. No, I don't mean the whole correction phase has been completed. Probably far from it. But in a few days or a week's time, maybe it's the time to buy not sell. In any case, I'm playing with safe bet for either way. When volatility is high, selling options either puts or calls is the best strategy for income trades. That's why volatility is money as long as you know how to do it!