Most stocks ended on a poor run in 2022, prompting many traders to shy away from risky investments. The past six months have also not provided the perfect environment to take a trading position. Options trading felt the hit of the market turmoil that has dominated many economies in the past year.
With traders moving to safe havens to protect their downside, short-lived rallies have not helped either—the swift upward and downward movements create an impossible environment for novice options traders who are still learning how to invest in options. Options give traders a right but not an obligation to sell instruments on expiry. In either call or put options, a fee must be paid to cover for that option that, depending on the holder, can be used as a hedge against market volatility.
In all, options trading provides a tricky scenario for the inexperienced trader. While traders holding an option contract have no obligation to sell, the contract can still expire, and if it does so while the markets have not settled in the appropriate position to make a selling decision, the trader takes some significant hit.
Timing
Finding the sweet spot in the stock market to dump an option at a profit is an up-heal task. The timing must be correct. Any miscalculation puts the investor in a position to make significant losses. In the last six months, fewer traders have invested in options due to the volatile situation prevailing. Specifically, there were alot of moving parts especially in the United States. The fragility of the country’s banks, comments from the Treasury Department, and the general anxiety from traders didn’t help the markets. Presently, the S&P has not provided highs that have convinced traders to take significant positions in the current dicey market conditions.
The highest point the index has touched so far is 4,300 points, while lows of 3575 have dominated the market. Indeed, the highs and lows of top indices dictate the market price of options.
Timing also influences pricing, to some extent, because option sellers use the prevailing volatile index to set prices. High-value options push out many investors, while those holding long-term ones have not made significant returns due to sideway price movements.
Capitalizing On Faltering Markets
Volatile markets are not excellent incentives that entice investors to take enormous risks, even while options trading. However, even when markets are not exhibiting positive signs, it is possible to make good money.
Sideway movements in the market dominate when the market is volatile. Further, the swift changes sideways discourage investors from selling their options, hoping for good news at the very end. The long wait often means the options expire—a loss for the entire investment.
Noteworthy, options offer different commodities that work at particular prevailing conditions in the market. Covered call options are the perfect commodity for volatile markets. Indeed, such kinds of investments have dominated the market for the past six months.
Covered call options solve the risk of expiry, which faces many investors waiting for the perfect conditions to dump their investments for profits.
Covered Call Options
Volatile markets mean that stock prices move up and down quickly, offering no perfect point in selling a call option. Some volatile markets also offer insignificant price movements that offer no meaningful return for the duration of a covered call option. However, the minuscule up and down movements present the perfect environment to buy a covered call option.
Covered call options are a neutral position taken to protect from market volatility that might render the investment useless after the expiry date. An investor holding the covered call generally takes two positions simultaneously—holding an asset long while also shorting the asset. The market value of the option at a specific future date is what the investor will use to generate income.
An Alternative
Put options also provide a good entry to safeguard against a volatile market. While not so attractive, put options provide an investor with the power to offset their investment at a particular market price for some time. A put bought at $70 with a prevailing market price of a stock at $90 can help safeguard against any losses when the markets grow negatively.
Bottom Line
Options provide an investor with two significant advantages, especially when the markets are not ripe for investments. The contracts help reduce volatility in an investor’s portfolio. Volatility is known to compound risk, and reducing it by some points means higher chances of a profit. Additionally, they help cut losses when markets move in reverse.