Options are versatile financial derivatives that enable traders to hedge risks and capitalize on market volatility. Using the right strategies can actually help you make a profit during volatile markets.
In this blog, we’ve mentioned five effective ways that can help you generate profits from volatile markets. Let’s begin!
5 Ways to Profit from Market Volatility in Options Trading
Here we’ve mentioned five key option strategies that can help you generate profit from volatility.
1. Buying Straddles and Strangles
Straddles and Strangles are two efficient strategies that can help you generate profit from significant market volatility, regardless of direction.
Straddles involve purchasing both call and out options at the same strike price, allowing you to generate profit when the underlying security moves sharply in either direction. However, it must be beyond the cost of combined premiums.
Strangles include purchasing OTM (out-of-the-money) call and out options with different strike prices. This strategy is more cost-effective than Straddles but requires significant price swings to generate profits. Simply put, this strategy is beneficial in scenarios where the financial market is expected to experience spikes but direction is uncertain.
Hence, these strategies can help you generate profits during major market shifts while limiting the downside to the initial premium paid, making them an ideal option for volatile markets.
2. Using Implied Volatility (IV)
Implied Volatility is used to measure market expectations of future volatility. IV usually increases with rising uncertainty, inflating option premiums.
You can leverage IV in two major ways, as mentioned below.
- Buying Options When IV is Low: Opt for this strategy when you expect a sharp increase in volatility because options are relatively cheap.
- Selling Options When IV is High: This indicates elevated option prices and allows sellers to gather substantial premiums. It allows you to potentially profit from IV decreasing post-event as uncertainty subsides.
In simple words, understanding Implied Volatility (IV) allows traders to choose the best time to buy or sell options. Hence, it increases your chances to make more profits in a volatile market.
3. Calendar Spreads
Calendar Spreads include buying a long-term option and selling a short-term option with the same strike price. Here, you profit from different rates of decay (theta).
The short-term option decays faster allowing you to potentially purchase it back at a lower price. At the same time, the long-term option retains its value.
You can potentially use this strategy during moderate volatile markets. This mainly thrives on stable or slowly increased price movements while capitalizing on time decay.
4. Breakout and Momentum Strategies
Breakout strategies are used to determine stocks that break through their typical ranges, suggesting significant price movements.
Traders are required to buy call options during breakouts and sell puts options during breakdowns.
Momentum strategies also enable you to capitalize on strong market trends. It requires you to buy calls during upward movements and put during downward movements.
You can use both of these strategies to gain substantial profits during volatile markets. This enables traders to position as the market starts moving sharply in one direction.
5. Volatility-Based Stop-Loss
Last but not least, volatility-based stop-loss allows you to adjust your exit positions based on current market volatility instead of a fixed percentage.
Using this strategy can help you prevent being stopped by random price fluctuations during volatile markets. This enables traders to hold positions through short-term noise and make profits from larger directional moves.
Therefore, setting up stop-losses based on volatility protects you from unexpected sharp price swings without prematurely exiting profitable trades.
Conclusion
In summary, doing options trading with the right strategies can help you gain substantial returns in volatile markets. Make sure to opt for the appropriate trading strategy based on your financial goals and objectives. Use the best option trading app to implement your desired strategies.