Chaos and Cash: Finding Opportunity in Volatility

Key Points

• Volatile stocks like Reed's and Oil States present unique opportunities for traders to leverage price swings and implement strategies for potential profit.
• Effective trading strategies such as straddles and swing trading can be applied to volatile stocks to capitalize on market fluctuations.
• Understanding the specific catalysts that drive volatility in stocks is key to strategically navigating the market for gains.

Volatility in the stock market is often seen as a risk to be avoided by cautious investors. However, for those who understand it, volatility can present opportunities for profit. Significant price fluctuations can be leveraged with the right strategies. When reviewing the current market, Reed's Inc. OTCMKTS: REED and Oil States International NYSE: OIS are examples of stocks exhibiting high volatility.

These companies are from different sectors, but they demonstrate the dynamic price movements that appeal to traders looking to capitalize on market swings. With a focus on risk management, investors can leverage targeted trading strategies to potentially profit from volatile stocks.

Reed's Company-Driven Volatility

Reed's Inc. (REED) is a player in the natural beverage sector, and the company operates as a micro-capitalization stock traded on the OTC market. This combination inherently predisposes it to a higher degree of volatility compared to large-cap, more established equities. Examining its 52-week trading range, from a low of $0.51 to a high of $2.42, immediately reveals the magnitude of price fluctuation experienced within a single year. Recent trading data further exemplifies this erratic behavior.

For example, on February 24, 2025, Reed's stock price surged by an impressive 15.56%, only to be followed by a decline of 8.50% just two trading days later on February 26, 2025. Such dramatic daily percentage changes are not uncommon for REED, underscoring its unpredictable price action.

Adding to this volatility is the low average trading volume typically observed for Reed's stock. Lower liquidity can amplify price movements, as fewer shares being traded can lead to larger percentage swings in response to buy or sell orders.

Reed's stock is highly volatile due to several factors. Company-specific news, such as recent earnings reports for Q3 2024 showing declining sales and operating losses, leadership changes, and financial health updates, can cause rapid price adjustments.

The speculative nature of micro-cap stocks, often driven by sentiment and momentum, amplifies these fluctuations. Limited analyst coverage can also influence the stock's behavior, making it susceptible to significant and unpredictable price swings.

Oil States and External Volatility Drivers

Oil States International (OIS) is a mid-cap company operating in the energy sector. In contrast to Reed's, OIS is a mid-cap company operating within the energy sector. Oil States' beta of 2.62 indicates that its stock price is significantly more volatile than the overall market. This means that for every 1% change in the S&P 500, Oil State’s stock price is likely to change 2.62% in the same direction. However, during market downturns, OIS will also experience amplified losses. 

Although Oil States is a larger and more established company, it is still subject to significant volatility due to industry-specific factors and broader market sensitivity. Recent price action reflects this heightened volatility. On February 24, 2025, Oil States' stock price jumped by 13.5%, demonstrating its capacity for rapid upward movement.

Examining daily trading data reveals consistent price fluctuations, although perhaps less erratic than Reed's on a day-to-day percentage basis. The average trading volume for OIS is significantly higher than REED, indicating greater liquidity. However, this increased liquidity does not insulate it from volatility; instead, it facilitates more significant swings in absolute dollar terms as more shares change hands.

Oil States' volatility is primarily attributed to the energy sector's inherent cyclicality. The sector's performance is tied to fluctuations in oil prices, global economic conditions, and geopolitical events. Any shifts in these macroeconomic factors can quickly translate into significant price movements for energy stocks like OIS. 

Broader market sentiment towards the energy sector as a whole further influences OIS's stock. Positive outlooks on future energy demand or rising oil prices can create upward momentum. At the same time, negative sentiment or concerns about the global economy can trigger sell-offs, all contributing to price volatility.

Victory from Volatility: Strategies to Capitalize

Investors can use specific trading strategies to take advantage of volatile markets and price swings. These strategies can help convert market fluctuations into profits and can be applied to volatile stocks in several ways.

Earnings Uncertainty: The REED Straddle Strategy

The straddle options strategy is well-suited for volatile stocks like Reed's, where a significant price movement is expected, but the direction is uncertain. This strategy involves buying a call and a put option with the same strike price (near the current market price) and an expiration date shortly after a major event, such as an earnings announcement. If the stock price moves significantly after the event, one of the options will profit, potentially offsetting the cost of both and resulting in a net gain.

Wider Nets, Bigger Gains: The OIS Strangle Play

Like a straddle, the strangle strategy targets significant price volatility but uses out-of-the-money options. For Oil States, a strangle could be used when expecting a significant energy sector move, perhaps due to OPEC meetings or shifts in oil demand. A trader might buy a call option with a strike price above OIS's current price and a put option with a strike price below, with the same expiration. Cheaper than a straddle, a strangle profits if Oil States' price moves substantially beyond either strike price.

Downside Insurance: The OIS Protective Put Strategy

Long-term Oil States holders concerned about downturns can use protective puts for downside defense. Buying put options on OIS while owning the stock acts as insurance. If Oil States' price falls, put option gains offset stock losses, limiting downside. The put option premium is the cost of this protection.

Swing Trading REED: Catching the Short-Term Waves

Due to its frequent price swings within a specific range, swing traders can profit from Reed's stock. By identifying support and resistance levels, traders can buy near support (e.g., $1.00) and sell near resistance (e.g., $1.40) to capture short-term price movements. However, this strategy requires active chart monitoring.

Taming the Turbulence: Risk Management 

Managing risk is crucial when trading volatile stocks. Implementing tools such as stop-loss orders can help limit the downside during volatile market swings. Additionally, utilizing proper position sizing by taking smaller positions in volatile stocks helps manage capital at risk per trade. Diversifying your portfolio can further mitigate risk by preventing overconcentration in volatile stocks and balancing with less risky assets. These risk management strategies are essential for navigating the stock market's inherent volatility.

Reed's and Oil States demonstrate that volatility offers substantial risk and significant opportunity. Both stocks experience substantial price swings, driven by unique catalysts. With a thorough understanding of these catalysts, targeted strategies, and risk management, investors can potentially leverage market fluctuations to generate profit.