First, to answer your question about the volatility required for this strategy, you need to think back to the days of school when you learned about standard distribution curves.

A standard distribution curve is the graphical representation of probabilities. Probabilities are easy to understand if you think of a coin flip.

If you flip a coin 10 times, the coin is likely to land on heads 5 times out of 10. If we expect to see the coin land on heads 5 times out of 10, we can say it has a 5/10 or 50% probability of landing heads. These 10 flips of the coin represent 1 outcome (landing heads 5 times).

The standard distribution curve represents all possible outcomes. In the coin example, it is not very likely that the coin will land heads 0/10 or 10/10 times. These outcomes are very unusual. The most likely outcome is 5/10 times. With a typical standard distribution curve, the majority of outcomes (~70%) will fall within a central area, which statisticians call 1 standard deviation. So when you graph the data, the graph looks like a hill (with most of the outcomes stacked up in the middle), with a tail to the left (0/10) and a tail to the right (10/10). The tails represent outcomes that happen the least amount of times.

So keeping this in mind, let’s apply this concept to stock prices. With stock prices, just as with other “random” things like coin flips, we will expect a stock’s price to fall within the area on the graph that represents 70% of all outcomes.

In the article, I mentioned briefly that options gave the right to purchase stock at a set price. I won’t get into the details of how option contracts are priced, but it is important to know that the cost of an option does account for volatility. When the market is more volatile, options cost more. They cost more because the chances of a big upswing or downswing increase, and if that occurs, you profit.

With the coin example, volatility could be thought of as putting a weight on one side of the coin. If you put a weight on one side of the coin, it will change the way the coin falls, and it will change the outcome of your flips so that it is more likely that it will land heads 0/10 or 10/10 times.

To answer your question, profiting from this strategy is hard to do even in a volatile market, because you would need to buy the options when volatility is lower. As market volatility increases, a big upswing or downswing is more likely, and so the cost of the options goes up. When options cost more, we have to pay more to buy these options, and it becomes harder for us to profit from this strategy.

The “Triangle Pattern” I presented in the article is unique, because volatility is typically lower than usual in this instance. This would be the perfect opportunity to buy options, because they will cost less than usual, and give you the best chance of making money.

For a stable market there is a different strategy which is relatively riskless, and is a great way to earn an extra return (2-3%) on your portfolio. We will cover that strategy later…