The majority of investors are aware of how unpredictable the stock market can be. That’s why it’s so important to stay informed on advanced strategies to manage and leverage volatility.
In this article, we’ll be highlighting some insights and techniques on how to navigate the dynamic landscape that is the UK’s stock market.
Options trading strategies
Several advanced trading strategies apply to volatile markets, and these can be used on your chosen trading platform. Experienced traders can utilise these to their advantage – whether that be hedging against volatility, generating income, or positioning themselves strategically during turbulent conditions.
Options trading strategies include the following:
- Go Long Puts: When volatility is high, those who trade in bearish markets may buy puts to keep up with market trends. Traders can reduce the cost of their long put position by buying an out-of-the-money (OTM) put or adding a short put position at a lower price.
- Short Calls: This position is taken when a trader believes the price of the asset underlying the option will drop. Short Calls may have limited profit potential and the risk of unlimited loss.
- Short Straddle: This strategy involves selling both a call and a put option with the same strike price and expiration date. It’s typically used when the trader believes the underlying asset will not move significantly over the lives of the options contracts.
Contrarian investing in volatile times
Experienced traders can apply contrarian investing in volatile markets. This requires the trader to make investment decisions that oppose prevailing market sentiment. This type of investor sees potential whereas others may see uncertainty.
The goal is to find undervalued or overvalued assets and take a position with them. This can help traders identify opportunities to position themselves strategically for potential reversals.
Tactical asset allocation
To navigate volatile markets, traders may apply tactical asset allocation. Here, traders will dynamically adjust their portfolio allocations based on market conditions, shifting their percentage of assets held in various categories to benefit from strong market sectors.
This strategy allows traders to create extra value by being proactive and taking advantage of certain situations in the marketplace. And, as an active strategy, it enables those to optimise the risk and returns during turbulent times.
Volatility Index (VIX) analysis
Many traders leverage advanced market analysis tools, such as the Volatility Index, to stay informed on market movements. The VIX measures the market’s expectation of future volatility, which is taken by S&P 500 Index option prices.
In addition, the VIX can help traders gauge market sentiment and predict potential trends to shape their strategies accordingly.
