higher volatility leads to higher option premiums and increased income generation. I always only buy inexpensive (OK, cheap) options around $2 or less in our Fast Options Profits trades, but options on volatile stocks also tend to have better liquidity (i.e., more people and money moving in and out of positions), which could help you to secure better option prices both when you're buying and cashing out.

Simply put, the more certainty there is about the future of an investment, the lower the return. For an options trader, upward volatility means two key things.

First, rallies often draw out the more maverick professional traders who will happily sell into rallies and downturns bring out pirates who scoop up discounted equities. They hope to procure profits from later repurchasing what they sold at cheaper prices or selling what they bought on discounts for higher returns.

The second thing that can impact your cash flow is that persistent rallies or downtrends actually bring is a decrease in volatility, which is the option trader's perception of risk in the stock market.

Learning how to invest successfully often means that you need to stop listening to your intuition. What I mean is that this is all counter-intuitive — a rally feels great when it's under way, but it ultimately leaves the market at a higher level. On the other hand, your stomach can sink during a decline, but a downtrending stock market offers some great buying opportunities.

Believe it or not, a higher market carries more risk than a market churning at lower levels. Options premiums typically contract during rallies with almost near-perfect regularity, while volatility can open doors to a lot of money-making positions.

Get to the Head of the Class — and the Cash

Some options traders are OK with accepting a financial pundit's interpretation of what is a volatile market, but the professor in me prefers to give you the know-how to measure it yourself.

The measure of risk in the S&P 500 (SPX), one of the bellwether indices, is charted by the Chicago Board Options Exchange's Volatility Index (VIX).

It's expressed as a percentage, where a higher percentage, or value, is accepted to mean there's a greater degree of market uncertainty. Conversely, a lower VIX value generally portends greater stability.

You can monitor volatility on the Nasdaq (NASD) as well, via the CBOE Nasdaq Volatility Index (VXN), and you can also check out volatility on the Dow Jones Industrials (DJI) via the CBOE's Dow Volatility Index (VXD).

In the past year, the VIX has ranged from 12.08 to 37.57. Currently, it's nestling in the 18 to 20 range, which lets analysts surmise that the S&P will fluctuate nearly 18% on an annualized basis.

With recent multi month-low readings on the VIX, you have a recipe for a larger-than expected pullback for stocks in the making. A low VIX reading implies an overly bullish and complacent market, and with the VIX index back down from 35 to a reading of 20, a period of backing-and-filling looks imminent.

Because of unpredictable variables that are described in the chaos theory, we never know what event could send the stock market or individual sectors tail-spinning or skyrocketing — sometimes it's a simple as the "sell in May and go away" belief.

But, as an options investor, the volatility is welcomed. Remember, the prudent course of action is to buy both calls and puts to profit from possible stock market volatility in either direction.

If you'd like to start profiting from market swings with options trading, join Fast Options Profits for a risk-free trial subscription to get access to the next batch of soaring options trades.  Get 2-3 of the Ken Trester's top trades that are backed by his nearly 35 years in options trading and extensive research. Sign up today!