How to Trade Volatility When Markets Are on the Edge

February 27, 2025 | Read Online

Don Kaufman here.

I'm not here to sugarcoat it or give you some canned Wall Street fluff. The markets are moving fast, things are getting a little wild, and if you don't have a plan, you're going to get steamrolled.

Whether you're an old pro or just dipping your toes into trading, navigating volatility is where the rubber meets the road—so let's break it down in a way that makes sense.

Volatility: It's Not Unprecedented, It's Just Business as Usual

First things first—stop freaking out about the headlines.

Is the market jumping around like a kid on a sugar rush? Sure.

But let me say this loud and clear: this is not unprecedented. I know, I know, the talking heads on TV are probably screaming about "market chaos" or "meltdowns," but let me tell you something—they're selling fear, not facts.

We haven't even seen real volatility yet.

The VIX (a.k.a. the "fear gauge") this morning was sitting at 20.

For perspective, that's like a mild drizzle compared to the monsoon we'd see if we were truly in a market panic.

Until we start breaking key support levels—like the E-Mini S&P 500 futures (ES) dropping below 5,900—and the VIX climbs into the high 20s or 30s, this is just another day at the office.

So, deep breath. Let's focus on what matters.

Expected Moves: The Map to Market Madness

You know what separates the pros from the amateurs?

Understanding expected moves. Let me explain: the expected move is the range the market is pricing in for a stock or index to move over a given time period.

Think of it like the guardrails on a highway—it tells you where the market should stay within.

Now, here's where it gets interesting. Today, the S&Ps have a $50 expected move. That means the market could swing 50 points up or down and still stay within its "normal" range. But if we crack through those levels, that's when things get spicy.

When I'm trading in this kind of environment, I'm not just looking at price levels—I'm watching the expected move like a hawk. It's my north star. It tells me where the market is likely to go and how much risk I'm taking.

Butterfly Spreads: My Weapon of Choice

Let's talk about strategy.

One of my favorite tools in volatile markets is the butterfly spread. Why?

Because it's limited risk, high reward, and perfect for capitalizing on these wild swings.

And it's a strategy I trade a lot in my 3 Trades A Week service.

Here's how it works: A butterfly spread is an options trade where you buy one strike, sell two closer strikes, and then buy another strike further out. Think of it like betting on a specific range where you think the market will land.

For example, earlier today, I opened a butterfly on the S&P 500 targeting 5,900.

The trade cost me 55 cents per contract. That's it—55 cents. If the S&Ps land near 5,900 by expiration, that trade could pay out $20 for every 55 cents I risked.

That's like buying a lottery ticket where the odds aren't stacked against you.

But here's the kicker: these trades don't always work.

In fact, they only have about a 30% chance of hitting. Why do I still take them?

Because when they hit, they hit big.

For example, last week I hit a monster 500% winner.

And in this game, it's all about balancing risk and reward.

The Volatility Box: Get Ready to Break Out

If you've been listening to me over the last couple weeks you know I've been talking about the "volatility box."

Picture a range in the market where all the risk is coiled up, like a spring.

Right now, the S&Ps are bouncing between 5,900 and 6,100. That's the box.

What happens when we break out of that box? Chaos.

If we drop below 5,900, all bets are off. The VIX will spike, the algo traders will go nuts, and the market could tumble fast.

On the flip side, if we rally above 6,100, you could see a face-ripping rally that leaves the shorts crying into their coffee.

So, what do you do? You stay flexible.

You don't come into the market with preconceived notions of how things should play out. You adapt.

You watch the levels, you watch the expected moves, and you trade what's in front of you—not what you wish would happen.

Risk Management: Don't Be a Hero

Let me give you some tough love: if you're trading without a plan, you're just gambling. And the house (a.k.a. the market) always wins.

Here's the deal: volatility is like fire. It can cook your dinner or burn your house down—it all depends on how you handle it. That's why risk management is the name of the game.

Know Your Levels: For me, 5,900 on the S&Ps is a key support level. If we break through that, I'm looking for opportunities to short.
Don't Chase Trades: If you're constantly canceling and replacing orders, you're chasing the market—and that's a losing game. Patience pays.
Limit Your Risk: Every trade I take has defined risk. Whether it's a butterfly spread or a simple options play, I know exactly how much I'm willing to lose before I even hit "send."

Stay on Your Toes

Volatility isn't something to fear—it's something to respect. It's what creates opportunities for traders who know how to manage risk and stay disciplined.

So, what's the takeaway?

Keep your eyes on the expected moves. Respect the levels. Use strategies like butterfly spreads to limit your risk and maximize your rewards.

And above all, don't get caught up in the chaos.

If you need help crafting that plan, I can help. With my 3 Trades Per Week Service, you'll get:

3 High-Conviction Trades Each Week: Step-by-step instructions designed to make trading clear and actionable, even for beginners.
Access to Our Live Trading Room: Watch the pros in action and learn how to find opportunities in real time.
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Click here to get started today.

To your success,

Don Kaufman

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