In fact, many traders took advantage of the big drop in 2008, but 2009 had even more opportunities. Volatility was on the rise in 2008 and it did not let up into the end of the year. The peak for volatility was in October and a bit in November, but prices kept falling through December.
Aren’t prices supposed to rise when volatility drops? Not necessarily. In fact, when divergences like this exist (prices down and volatility down or prices up and volatility up), it is time to take a pause and wait for correlations to re-establish themselves.
Options trading is all about timing
That is where we find ourselves today. Last week, markets rose sharply, marking the first weekly rise in a month. That’s quite a long time, but markets have been under distribution for a few months now.
If you don’t feel like you’ll get timing right in this market, take a pause and save yourself from losing precious capital. It can be hard to say, “I need to go to the sidelines” when the market rallies. However, a big rally like we had last week tend to pull us off the sidelines at the wrong moment.
Markets were severely oversold into Christmas and were due for a rally, if only because sellers were exhausted. Bear market rallies are spectacular and are usually some of the biggest and best ever. Volatility is still quite elevated, and uncertainty is still high. However, if markets can rise again these next few weeks, we might see volatility drop sharply and then a good move up may stick.