2 Reasons Why Keeping Cash Is A Great Idea In Volatile Markets

The past three weeks have been some of the most volatile trading in the last three years; all the more reason why keeping a good stack of cash is a great idea in a volatile market. Most options traders incorrectly think that they need to have money invested at all times in the market. They force trades into the market when the risk/reward ratio really isn’t there.

What can we learn from this “mini-crash” we have all just gone through? Well, if you are an options traders you learned 2 valuable lessons on why keeping cash is so important in a rising volatility market.

1) Cash leaves room for margin expansion…

I think there is no question that a lot of new options traders learned that their margin account can actually increase very rapidly on them. And if they were 70-90% invested before the selling started then the term Margin Call become a new vocabulary word.

Having cash ready and low levels of margin usage in a low volatility market leaves room for that margin to expand with increasing volatility. If you did’t over-invest then you have plenty of room in your portfolio to withstand the market swings and come out alive (or at least not with a blown-up portfolio).

2) Cash on hand can be used for ridiculously profitable trading opportunities…

As the VIX above shows, high volatility levels can be easy pickings for options traders. Since they historically don’t last long, those traders who have additional cash on hand can go out and “bottom pick” the market for ridiculously easy profits.

One way I that I like to take advantage of this is with short naked puts. Just this past Friday, you could sell a Put on the S&P 500 at a strike price of 750 and take in a premium of nearly $167 per contract! That’s an easy 2.23% return in 24 days AND the market would have to drop another 35% for you to lose money.

Again these are the kinds of easy trades that you can make if you keep some cash in your portfolio.

Technical Indicators Show We Are Near A Bottom

All the indicators out there are showing that we could be setting up for a very strong and sustained move off these August lows in the coming month. Everything from insider buying to sentiment indicators show buy signals.

Probably on of the biggest signals comes from the NYSE Percentage of Stocks above their 200-Day Moving Average. As of Friday, this indicator is at the same level as previous major stock market bottoms.

I know it came be hard to get back into the market after the huge swings but if you want to be an emotion-free trader who uses technical analysis, now could be a good time to start build up your portfolio again.

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I’ve been told by tons of people that you’ve got to either have a lot of money or a really killer system to trade options and win. Some new indicator or signal that will transform your portfolio.

And I’m sure you’ve heard the same thing and are sick of these expensive, dead-end courses and websites wasting your time and money.

Honestly, there is no “magic secret” to trading options. It simply comes down to an understanding of risk management, option pricing and strategy selection.

Instead of learning these lessons the hard way (i.e. losing your shirt in the market), why not take my free 4-part video course as I cover each area in detail. Plus, I’ll go over the exact checklist I use for selecting trades each month!