The best options strategies for volatile markets help investors tide over the fluctuations and get some gains from the huge swings in the prices in the financial markets. The prices may remain neutral, fall or rise. The main issue is finding out how much the volatility and the price movements will be. It will help to choose the best options and strategies for volatile markets. The strategies given in this article are crucial but easy to implement. This will help even newbies in the financial markets invest in options and gain from them. You may be expecting that the financial markets are going to experience a lot of fluctuations in the near future. Then, one of the best options strategies for volatile markets is to use the long strangle. This strategy looks to get potential gains from steep movements in the prices.
The more the financial markets experience fluctuations in the prices, the greater the chance that the stock may make a big move in either of the directions. One of the best options strategies for volatile markets is called a strangle, which can be used to make gains from the fluctuations in the markets. An investor purchases both a put and a call for the same stock and expiration date in this strategy. But the exercise prices are different for each option. The main difference between the straddle and the strangle is that the latter's exercise prices are not the same. The exercise prices are the same as the straddle strategy and are purchased at the money. One of the main reasons for selecting different exercise prices for the strangle strategy is because there may be a bigger chance of the share moving in a single direction. So, the investor may not want to shell out as much for the other side of this position created by the strategy.
The trader still has the viewpoint that the prices will move a lot. But they think that it is going to move in a single path. So, they will pay a much lower net debit than what would be required to purchase a couple of at-the-money options contracts for the straddle strategy. For instance, you might think that the stock has a better chance of seeing higher movements. Then the trader might want to go with a less costly put option with a lower exercise price than the call they want to buy. The put bought by the trader will also help the trader get gains from a movement to the downside. But the movement will have to be more in that particular direction. The disadvantage of this strategy is that there is less risk on the table. So, the chances of gains are also lower. A much bigger movement in prices will be needed to get past the break-even instilled in this strategy. There are some main concepts related to long strangles. Suppose the price of the stock goes up. In that case, the overall value of the call options usually increases, and the value of the put options sees a downfall.
Contrarily, if the stock goes down, the put options usually go up, and the call options decline. If the implied volatility of the contract grows, the values also see an increase. If the implied volatility of the options contracts sees a decline, the values also decline. This can lead to making the trades a little less profitable or even unprofitable when there is a huge movement in the underlying shares. There may also be a condition where the prices of the stock remain unchanged. Then, both the options contracts are going to expire worthlessly. The loss of the position will be the overall cost of buying the options contracts. In this strategy, the trader is the holder of both the put and the call. So, the time decay tends to decrease the value of the options contracts as each day passes. This is the main rate of change in the overall value of any options contract as the time to expiration comes down. The trader may require the stock to move rapidly when implementing this options strategy.
The trader might lose out on both the legs of the strategy or vice versa, and they may make money on both the legs. But the main aim of this options strategy is to generate sufficient gains from one of the options contracts that grow in value to cover the overall cost of purchasing both the options contracts and give the trader some net profits. A long strangle gives a lot of potential for gains and restricts the risk of loss. Like the straddle, if the stock moves a lot in either direction before the date of expiration, the trader can get some gains. But if the share is trading in a very narrow range of trades within the overall break-even range, the trader may lose a part of the entire investment made in the trade. The higher levels of volatility and fluctuations may lead to a growing chance of a favorable movement for a long strangle strategy. Still, it may also lead to an increase in the overall cost of executing this options strategy.
Suppose the options contracts are at a higher mark of implied volatility. In that case, the premium will be marked higher to show the greater chance of a big movement in the stock. So, suppose the implied volatility of the options has already increased. In that case, it may be a little too late to kick off this options strategy without overpaying on the price of the contracts. The trader might want to go with the short strangle in such an event. This strategy gives the chance to sell the volatility in the options contracts and get gains from inflated premiums.
This is another one of the best options strategies for volatile markets. It has been created to help the trader when the volatility is going to come down. This includes going short on put and call options with equal expiry but varying exercise prices. The short strangle is also a strategy not specific to a single direction. It would be utilized when one thinks that the stock will not see much movement in the near future. But there is a high chance of volatility in the financial markets. As a seller of these options contracts, the trader thinks the implied volatility will decline. They will be able to close out the options contracts at a lower price point and see some gains. With this options strategy, the trader is taking in income upfront. This is the premium that is received from selling the options contracts. But they are also exposing themselves to higher margin requirements by the brokers and unlimited losses in positions that are not hedged.
The risk of employing the long strangle strategy is that the stock may not show any movement in its prices. The price of the stock may rise. But it may not go above the break-even price. Also, both the options contracts might see a decline in value. Then, the trader can either sell to close out on both the put and call for a loss to manage the overall risk. Or they can attempt to wait a little longer and see a turnaround in the prices. You may also want to sell the call that still has some value remaining. The trader can monitor the put for any increase in value if the market decreases. The risk of waiting until the options contracts expire is the chance of losing out on the entire investment made initially. The trader might also try to roll the position to a further period if they think that there is going to be more volatility in the future.
The straddle is one of the best options strategies for volatile markets. It can be very useful for those stocks that may make a big move. You can use it to major gains from big moves in a certain direction.