The One Simple Strategy You Need To Use In 2018

It’s that time of year again … and I love it.

We get to take out our crystal balls and predict what 2018 has in store for us.

I’m taking an easy one today. Easy, but a highly profitable prediction that will undoubtedly come true.

That’s because the market has a natural ebb and flow to it of ups and downs that we’ve come to expect each year.

But in 2017 we saw an uncharacteristic market.

I wrote a few weeks ago about 2017 having the smallest drawdown so far this year since 1994. In short, the S&P 500 has only pulled back by 3%.

In a market like this, volatility has been kept to a historically low level as well. But, next year, this will change … and there’s one strategy that you must take advantage of.

Spikes in Volatility

Volatility, as tracked by the CBOE S&P 500 Volatility Index (VIX), reflects a minimal drawdown year as you’d expect — with minimal volatility.

But when you look at volatility over the past 12 months, you might think we saw some considerable spikes.

Take a look:

And indeed, at those blue points, it spiked. But without any meaningful sell-off throughout the year, volatility quickly fell back to minimal levels.

On this chart, you will notice the blue line.

That represents the 20 level for the VIX. This is my sweet spot. Once we see volatility spike above 20, it usually doesn’t take long for the market to settle down.

Knowing this, and understanding that the market is not yet near a point to enter a bear market, a spike in volatility is an ideal time to collect income by selling put options.

Selling Put Options

And the goal when selling a put option to collect income is for the options price to be higher. The higher the price of the option, the more income you collect — it’s that simple.

And when the VIX is going up, it means all things being equal, the price of that put option is going to be higher.