5 Strategies for Trading Volatility With Options

Volatility With Options
566 Views

It would be impossible to discuss options trading tactics without market volatility. This is due to their close relationship. Investor perceptions of the options are sensitive to changes in market volatility. Regardless of the market condition, you may benefit from options if you understand them and how the market’s volatility impacts them.

However, whether you are a novice or an expert individual, you should search for the best strategy to generate profits. Now let’s talk about the top strategies for trading volatility with options.

Options and Market Volatility

Let’s first discuss implied volatility (IV) and how it affects options before looking at the trading strategies. An option’s future value is significantly influenced by the IV. It forecasts changes in the value of an underlying asset. This in turn influences the price of the option.

The market’s prediction for the stock prices and the demand for the options both affect volatility. As a result, volatility will increase with a spike in option demand and vice versa. An increase or decrease in IV is quite relevant since it affects the outcome of a transaction.

Best Options Strategies for Volatility 

Let’s now look at the option trading strategies for volatility. 

Straddle 

This two-legged options strategy aims to profit from extreme market volatility. Buying to open a call and put on the same stock at the same strike price and expiration date is known as straddling. In this manner, you guarantee a profit no matter how the underlying stock price fluctuates. To get premiums for both call and put options, the trader in a short straddle transaction sells both at the same price strike.

The straddle may be a successful strategy when you anticipate an increase in the volatility of the underlying stock within the predetermined timeframe.

Strangle 

The strangle and straddle strategies are identical to each other. Both strategies include bearish and bullish trades on the same underlying stock. To trade a strangle, you must purchase, open a call, and put on the same stock with the same expiry date.

However, the strangle has a call and a put at two distinct strike prices. Both strikes revolve around the stock price and are out-of-the-money (OTM). The trader gets a broader safety net with this strategy.

The strangle strategy is used to profit from the extreme volatility of a market. It is useful in situations where there is a strong chance of a prominent directional change for the underlying stock.

Iron Condor

The short strangle comes with unlimited risk. So, you can use the iron condor strategy. Two OTM short vertical spreads make up the iron condor setup.  One is on the call side and the other is on the put side. You can get several opportunities to profit with the iron condor if the underlying stock stays within the strikes.

When looking for options strategies with high volatility, a lot of traders choose the iron condor. This is because it may yield a profit in a short amount of time. If your forecast is incorrect, this strategy also caps your losses.

Naked Calls and Puts

The easiest approach to employ is naked calls and puts. However, it carries a significant risk if your forecast is incorrect. This strategy is therefore meant for more experienced and skilled traders. With this kind of strategy, the investor is forced to sell a call option. There is no assurity of owning the underlying stock. You have to sell an OTM option whether you are bullish or bearish on the underlying security during this period of extreme volatility.

Credit Spread Strategy 

Buying or selling options contracts of the same class and expiration dates, but different price strike levels is the credit spread strategy. Here, traders receive a net credit and hope that prices decline or expire below the sold call option’s strike price. You may assess how much money you will risk after you start an options strategy position by using the credit spread to restrict your exposure.

The credit spread can be profitable when the option’s premium value decreases. The maximum loss associated with this approach is the difference between the strike prices and the net credit if the options expire out-of-the-money. Because it minimises losses, this strategy is less dangerous than naked calls and puts during turbulent markets.

Conclusion

As a trader, you might benefit from the market’s volatility since it keeps option prices high. This gives you the chance to take profits. However, it’s important to assess the risks and choose the appropriate trading strategy before you invest. There are some useful options trading strategies which you can use. The iron condor, strangle, and straddle, are some of them. You can implement these strategies on a share market app of firms like Share India. Such excellent platforms are built with sophisticated softwares and offer advanced trading tools. You may trade volatility and stay on the right side of the market by understanding how such strategies work.

Leave a Reply

Your email address will not be published. Required fields are marked *