Find all Volatile Option Trading Strategies here.
The potential to earn exponential returns and the scope to apply an array of strategies are viable reasons why the options market appears an exciting avenue to traders.
While there are many flavors to each options strategy, it is crucial to identify the fundamentals of ‘calls’ and ‘puts’ before trading in the market.
A typical options strategy or a combination of many is good to explore so that investor can extract maximum returns from the movement of stock prices.
For the savvy investor, the right blend of trading strategies can reap modest to abundant returns.
What are Volatile Option Trading Strategies?
Buy low and sell high is the mantra that drives the intentions of scores of investors and traders in the market every day. Interestingly, trading in options is no different or queer than this.
Add the essential spice of volatility to this broth and you will discover the sizzle of numerous strategies that erupt further. This is where the window to dash gains lies for an investor.
The sheer brilliance of volatile option trading strategies lies in the fact that the investor can earn profits without predicting the direction that stock prices will take.
As long as the potential for a substantial price movement exists, one or more of these volatile options trading strategies are good to use to bag the sac of gold.
But the potential to make huge gains is marked by the possibility of losses. This is because it is next to impossible to put down the risks that come with these strategies. And, it is unwise to overlook the existence of it altogether.
The element of risk exists because, in order to be successful, the movement of stock prices in an option needs to be large enough.
It can happen in either direction but it should nullify and overcome the loss resulting from the opposite option.
When the same in not viably large, the resulting price movements could mean losses or negligible returns. This can happen if the price movement is in an unfavorable direction.
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More on Volatile Option Trading Strategies
There are many instances which can swing the prices of a particular stock hither or tither. Impending settlement of a lawsuit or closure of quarterly financial results is just some of these.
Under conditions such as these, it is highly likely that the resulting volatility in the market will create opportunities to gain hefty returns.
When a trader expects a huge swing in the prices of an underlying asset, either north or south, they can choose a volatile option trading strategy to bet on the spread, resulting from such volatility.
What merits discussion then, is the nature and format of these strategies. This is crucial so that a trader can implement them and raise his odds of making gains.
Dealing with Market Volatility with Volatile Option Trading Strategies
The prices of an option face impact from several factors but most of them happen to be predictable in nature.
The only exception is market volatility, which happens to fall under the scope of estimates by experts. And yet, in spite of the existing ambiguity in its nature, the weight of its impact on option price is maximum.
It is interesting to note that market volatility can result either from an implied cause or a historical event.
Yet in terms of relevance, a trader will always consider implied volatility over its historical volatility in the first instance. But, this does not make the latter dormant or unviable in determining the extent of the former.
Considering the basic fundamentals of investing and making returns, the golden formula runs akin to the convention.
How can a Trader win over Volatile Market Conditions?
Since volatility in the market is an inevitable situation, investors can benefit if they manifest a long term strategy.
The winning reality is that a volatile market means heavy trading and wide price fluctuations. For the skilled investor, this is no less than a doorway to make desired returns.
An average investor is likely to make use of dual directional strategies so that they can benefit from price movement in either direction.
This involves taking multiple positions, which are expected to yield a maximum profit at a limited loss.
The underlying stock must move by a wide margin in one direction to make this happen. Using one or more such trading strategy is known as a volatile trading strategy in the options market.
An example of this practice is the long straddle strategy. Here, the investor will ideally buy an equal number of call and put options on the same security for the same expiry period and the same strike price.
The initial outlay will be limited to the payment of premium on buying these calls. But, the scope to make returns is unlimited, so as long as the security moves by enough margins in one direction.
It is clear how volatility creates an opportunity for the investor in the market and how an investor can stay on the winning side, irrespective of the direction in which the market moves.
List of Best Volatile Option Trading Strategies
Listed below are among the most common strategies that a trader can employ in the options segment.
However, strategies vary in their complexity, which impacts their overall applicability in combination with other peer options.
Let us explore some of these strategies and cover the instances where they can be applied by an ambitious trader.
Long straddle – Volatile Option Trading Strategy
This is the way to go when you want to invest in stocks with a hedged approach. The strategy is quite simple, possesses a minimum risk but presents an endless scope to make rich gains.
When significant changes in the movement of prices can happen but not specifically in a particular direction, an investor can purchase a long call and put option for the same expiry date and same lot size.
Here, the strike price is equal to the present price of the underlying stock.
Long Strangle is among the simplest and cheapest strategies which generate a handsome return by betting on volatility.
With the expectation of price movement in a security, the investor has the option to purchase both, buy an out the money call and an out the money put, which have the same date of expiry.
This gives the investor a right to buy a call and put option at a strike price which may be higher or lower than the present price of the security.
In the absence of intrinsic value, the strategy costs quite low. The best time to enter a long strangle strategy is when the expected trigger in the stock price is high.
It is one of the most used Option Trading Strategies in Volatile market conditions.
Similar to long straddle, in essence, an investor would go for this strategy when he expects a significant drop in the price of a stock.
It is obvious why the number of put options purchased in this case will be far more than the call options. In fact, call options are purchased only as a hedge in case, the opposite was to happen.
This strategy is an optimum choice when an investor expects a major downward movement in the prices of a stock.
Thus, in this case, the investor will be smart to put more of his money in out the money put options than out the money call options.
The strike price being lower than the present value of the stock, a massive drop in the prices will reap major gains for the investor.
Strap Straddle is Volatile Option Trading Strategy.
This strategy is useful when there is a bullish inclination in the market trend. The investor should invest in more call options than put options for the same date of expiration.
Strap Strangle – Volatile Option Trading Strategy
An investor is likely to opt for this strategy when the direction of a breakout in price movement is expected to be on the upper side.
Hence, an investor can purchase more call options as compared to put options.
With limited risk but an expensive spread, this strategy will yield benefits when the rise or fall in the stock price is exponential. Here, the strike prices are lower than the current price.
Call Ratio Backspread – Volatile Option Trading Strategy
In a call ratio backspread strategy, an investor will buy calls and then sell the calls at varying strike prices using different ratios.
But, this will be done for the same date of expiration. Technically, more calls are purchased than those are sold by the investor.
Put Ratio Backspread
Considered to be a complex strategy, it can be used by an investor when they expect a price fall in a stock price. The investor will use a combination of short and long puts to reap profits.
Short Calendar Call Spread
This strategy implements selling a long term call and buying a short term call at the same strike price. Profit accrues if the price of the stock is up or below the strike price on the date of expiration.
Short Calendar Put Spread
In this strategy, an investor will sell a long term put option and buy a short term put option at the same strike price.
There is risk in this strategy if the price of the stock happens to revolve around the strike price on the date of expiration.
Short Butterfly Spread
This is a three-part strategy where an investor will sell a call at a low strike price, buy two calls at a high strike price and sell a call at a strike price higher than the previous one.
The expiration date of each call is the same. This is a relatively advanced strategy.
Short Condor Spread
This strategy is a typical four-part strategy that involves selling a call at a low strike price, buying a call at a high strike price, buying yet another call at a strike price even higher than the previous one and selling a call at the highest strike price among the rest.
Since costs are high, there is a small profit potential.
Short Albatross Spread
This is a relatively advanced strategy and hardly recommended for beginners. It is the same as short condor strategy with the difference being a wider strike difference.
Reverse Iron Butterfly Spread
The strategy creates a net debit trade for an investor. Here, they should get an out-the- money put option at a low strike price and consequently, an out-the-money put option.
The profit comes to the investor when the price of the stock moves either above or below the strike price.
Volatile Option Trading Strategies – Conclusion
There are many other strategies to make the right move in the options market and earn desired profits.
Since, the investor deals with market volatility, they must proceed with taking a knowledgeable stand with each strategy. This helps to understand the risk that they can assume.
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