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To Deal With Volatility, Consider These 3 Options on the Risk Spectrum

They range from doing nothing to jumping into the day-trading fray.
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Let's face it, the only folks who enjoy this type of price action are intraday swing traders and scalpers. But the dirty little secret that no one wants to admit, especially on FinTwit, is that more than 95% of retail and professional traders have no business trying to trade intraday swings when the volatility index spikes above 25. In my experience, most traders who fancy themselves skilled traders get run over either by the intraday volatility or their emotions and end up losing money.

So, the way I see it, you've got three options.

Option No. 1 is the simplest: Sit on the sidelines and do nothing. While boring, if high-risk speculation isn't your forte or the thought of staring at your screen all day makes your back tense up, keeping your hands off the keys will spare your wallet and your blood pressure some pain.

Option No. 2, and likely the most appropriate for the greatest number of investors, is to add to long-term holdings or initiate new ones at prices you've been waiting for. If you're a long-term, long-only investor, this option is for you.

On Monday, I took advantage of the weakness to add a new name to my long-term dividend account -- T. Rowe Price Group (TROW) . The stock currently yields around 2.7%, has raised its dividend annually for 35 years and has a 10-year dividend growth rate of about 13%. And while I have no clue if Monday's low will mark a bottom -- I doubt it -- most of my dividend investments are held for many years, so nailing the perfect price isn't my primary concern.

I also added to my AdvisorShares Pure US Cannabis ETF (MSOS) position, but to be clear, I actively trade around this position. I want long-term exposure to the multi-state operators (MSOs), but the trend is as bearish as it gets. While not always successful, I try to buy the extreme misery in the MSOS and sell any added exposure into the relief rallies, with the ultimate goal being to reduce my cost basis over time.

Option No. 3, arguably the riskiest, is to try and trade the day timeframe price swings. I say day timeframe because while I wouldn't fault someone for holding a small portion of a winning day trade overnight, my approach is to avoid all overnight trades until the market (or whatever I am trading) is back above its 10-day exponential moving average (EMA). Swing trades aren't on the table until price is above the 21-day EMA.

And rather than day trade individual stocks in this environment, I primarily stick to the SPDR S&P 500 ETF (SPY) , Invesco QQQ Trust (QQQ) and ARK Innovation ETF (ARKK) . As I've detailed in the past, my approach always begins by marking the session's five-minute opening range (OR) and formulating my day timeframe basis around whether price is above or beneath that OR and where price is in relation to the session's volume-weighted average price (VWAP).

At the time of publication, Byrne was long MSOS and TROW.