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Options Trading can be extremely profitable if done properly and therefore, it is steadily gaining massive popularity these days. However, one needs to remember the current market condition is extremely volatile and losses will be inevitable if improper options trading strategies are involved. One small mistake can eat up one’s entire capital which is why traders need to be extremely cautious regarding how they strategize their trades. Certain kinds of options trading strategies can enable traders to profit from these wild price swings, be it a price rise or a fall.
Best Options Trading Strategies For Highly Volatile Markets
Top 4 Best Options Trading Strategies for Highly Volatile Markets
1. Long Strangle
One should choose the long strangle strategy if a stock is predicted to become more volatile. In order to use this method, a trader must purchase both an “Out The Money call” and an “Out The Money put” option with a matching expiration date. In essence, the strike price of an OTM call option is often greater than the price of the underlying asset, whereas the strike price of an OTM put option is typically lower than the price of the underlying asset. Furthermore, the trader has the option to modify the strike price.
The nicest part about using a long strangle is that it gives traders a limitless profit potential with a small loss possibility. As both the put and call options are out of the money and have no inherent value, and as a result, they are also substantially less expensive.
Also, because the trader is holding both the call and put options, he will still make a respectable profit if the underlying stock price starts moving dramatically. However, despite the fact that increased volatility may increase the likelihood of a long strangle position performing well, it will also drive up the cost of making the bet overall.
2. Short Strangles and Straddles
The process of both short strangles and straddle involves selling a call and a put on the same underlying asset and at the same expiration date. The only difference between the two is in the case of a short strangle the trader sells the call of a higher strike and the put of a lower strike while in a short straddle both the call and the put are sold at the same strike price.
Both these are perfect strategies to apply in a volatile market as they are delta neutral or non-directional and one just needs to bank on the factor that the underlying stays within the selected range. Therefore, these can be used when traders have no directional view of the market and are just betting on whether the market will become more volatile or less volatile.
As Options Traders who are following a short strangle strategy usually sell both their call and put on different strike prices with both usually out of the money it gives them a wider range of safety. Also, as per this strategy, the underlying can move around more and deliver profit at the same time. However, on the downside, the profits are much lower in straddle but the risk is unlimited.
3. Strip Straddle and Strip Strangle
If traders believe the price of the underlying stock is going to decline dramatically, they can choose a strip straddle strategy. As a result, they buy more put options than call options. In essence, strip straddles are similar to long straddles, but because they are neutral strategies that offer twice the profit potential on downward price trends compared to corresponding upward price moves, they can be largely suitable for bearish markets.
Moreover, the best thing about choosing this strategy is that it allows one to increase gains while keeping the overall risk of loss associated with this position only to the amount of option premium paid.
Again, a strip strangle can also be chosen if the traders believe an underlying’s price will decline significantly. Hence, in this too the traders should purchase more OTM puts than OTM call options. These OTM options have no intrinsic value as such.
Additionally, the put option would be cheaper in this case than the underlying’s current price due to the strike price. The trader moreover, gets to choose how much out of the money they wish to be. The premium will be less expensive the further out in money they are, but being too far out in money could hurt profits.
4. Iron Condor
The iron condor technique will work for the ones who like the short strangle technique but are unable to accept the related limitless risk. In light of the extremely volatile market conditions, the aforementioned method may be used. In this, setting up four out-of-the-money options is required: a long put that is farther OTM, a short put that is closer to the money, a long call that is further OTM, and a short call that is closer to the money. As a result, traders who choose this technique can experience a broader range of profits when the underlying stays within the range of the strike prices while also limiting their losses simultaneously.
Further, in the case of the Iron Condor approach, the value in the options comes out quickly and bestows the trader with sizeable profits within a short span of time itself. The best part is it can be modified with a bullish or bearish bias and even if one’s prediction gets erroneous their losses will get capped without blowing out their portfolio.
Despite the fact that options trading is profitable, it is always risky given the unstable global economy at the moment. However, if the right techniques are used and proper trading plans are followed, gains can be ensured even now. The above-mentioned methods are some of the best options trading strategies that can generate profits in the current volatile market. Yet, before using any of these, one needs to educate themselves on how they actually work and should also conduct productive independent research regarding them.
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