The Federal Reserve is threatening to raise interest rates sharply to curb inflation. This is the only effective tool they have, and as much as they need to rein in inflation, a more hawkish stance will add uncertainty to the markets. To survive as a trader, you need to manage rising volatility. This is not a time to be complacent.
One of the biggest uncertainties is how far the Fed will go to combat higher prices. Until rate hikes begin to take effect, they won’t know when it is time to stop raising interest rates.
Rising volatility is going to have a stinging effect on stocks. Most investors and traders do not like wide moves up and down on a daily basis. When the VIX (Volatility Index) moved up and over 30% and stayed there this winter, everyone became quite uncomfortable. That discomfort led to several massive selloffs, driven by a “shoot first, ask questions later” mentality. Panicking is not a solid strategy for protecting or growing your portfolio.
How to manage rising volatility
If you follow me and read my blogs on a regular basis, you probably know the strategy I’m about to recommend: Add index puts to protect your portfolio from rising volatility. My favorite put instruments include SPY, DIA, QQQ and IWM. These are all liquid and will offer you great protection in times of need.
The goal is not to cash in and make loads of money (though that can certainly happen very quickly). Rather, we want to blunt the market volatility as much as possible.
Markets go down faster than they rise. The pain you feel as you watch markets drop is more intense than the joy you feel on the way up. When you protect your portfolio, you’re not just protecting your money – you’re also providing yourself with some peace of mind. And can’t we all use more of that these days?
