Don’t Chase Momentum. There’s a Better Way to Invest.

The stock market’s recent peregrinations are a reminder that not all volatility is equal—and therein lies danger and opportunity.

When prices advance, like the recent rally that pushed the Dow Jones Industrial Average over 50,000, many investors become exuberant. But too few realize extraordinary advances that defy the market’s typical behavior—let’s call them “socially acceptable volatility”—are suspect.

Big stock declines, by contrast, are celebrated by few. Most investors fret the end is nigh, and they often panic out of positions, as witnessed during recent weakness.

The danger of these big moves—which are like a giant metronome that swings over the market—is that they can infect the analytical mind-set needed to successfully navigate markets with the momentum-trading virus. When that happens, danger tends to lurk around the corner.

If big declines provoke anxiety, reduce position sizes to lower investment risk, or take profits. If you are overly elated by big advances, you should probably take some profits, too.

Markets are increasingly defined by gambling products that turn investing into short-term games. The options market is at the forefront of that trend, which masks an important fact that can help all investors: Options trading is a way of thinking and acting that provides a solid framework for decision-making.

Most investors would do better to think like options traders.

Seasoned options traders are ice cold. They are constantly assessing risk, asking if this is as good, or as bad, as it gets. They are quick to snip losses and quick to take profits. They have a plan, and they follow it, and constantly use market data to challenge their thinking.

Unlike the field-of-dreams stock market, the options market is predicated on what might happen, and when and why. Every put and call strike price and expiration date is embedded with probabilities that can be used to determine the odds of a stock rising or falling.

When the market mob is too greedy, or too afraid—and that is the essence of a huge move, up or down—options-centric investors look to buy on fear and sell on overconfidence.

Falling stocks inflate put options with fear premiums. In response, options traders sell puts—which increase in value when stock prices decline—which allows them to cherry-pick quality stocks.

When stock prices surge, many traders sell call options—which increase in value when stock prices rise—hoping to cash in on the predictable pattern of others buying calls and stocks to monetize momentum.

The reasoning behind that logic is simple. Investors overreact. They are either too afraid or too confident. Where you want to be is serenely at the center: not too happy, nor too dour, but instead long-term greedy, making sure not to do anything stupid that loses money.

While taking no action is always an option for true long-term investors, many others feel they must be in perpetual motion. This reflects how brokerage firms make clients feel with their marketing. Other people are under dire financial pressure and feel they must invest to offset expenses.

Whatever your motivation, let this column remind you of the importance of having a plan to handle volatility. You don’t want to panic out of, or greed into, positions. You want to have a plan, and you want to be disciplined. If you do that, volatility becomes an important tool that helps, rather than harms, your interests.

Something else important will happen, too. You will develop a deeper understanding of how markets function, of normal and abnormal investor behavior, and you will arm yourself with a decision-making framework that is so critical to living a successful life—in and out of the markets.

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Originally Posted February 11, 2026 – Don’t Chase Momentum. There’s a Better Way to Invest.