Options Strategies For Volatile Markets

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Whatever strategy you decide to use, the most important thing with options trading is knowing what you’re doing. Like any financial instrument, options come with risks, but when used strategically, they can help safeguard your portfolio, increase your income, or boost your potential returns.

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What is Options Trading and How Does it Work?

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Options are a type of financial derivative. Sounds dull and maybe even a bit complex, right? Well, they are complex—but definitely not boring. With options, you're not just stuck buying or selling a stock outright. Instead, you can take a position based on precise predictions—like how much a stock might move and within what time frame. In short, options give you… more options.

Options are contracts. When you purchase an option, you are buying the right (but not the obligation) to buy or sell a specific stock at a specific price by a specific date.

Three options strategies for volatile markets

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1. Long put options:

Commonly seen used for: downward-trending markets

A long put option gives you the right to sell a stock—typically 100 shares—at a set price before a certain date. It’s a strategy you can use to profit if you expect the stock’s value to decline. But it’s also a useful form of protection: by purchasing a put, you can hedge against potential losses on stocks you already own. If the stock price drops, the gains from your put option can help balance out the losses in your portfolio.

For example: Let’s say you paid a $100 premium for a put option on a stock currently trading at $50, with a strike price of $45. If the stock drops to $40, you could earn $5 per share on 100 shares—that’s $500—minus the $100 premium, leaving you with a $400 profit. On the other hand, if the stock stays above $45 or rises, the option won’t be worth exercising. In that case, your maximum loss is limited to the $100 you paid for the option.

2. Covered calls:

Commonly seen used for: steady or mildly bullish markets

Premiums from covered calls can also help cushion losses in flat or slightly declining markets. A covered call involves selling call options to other investors using stocks you already own. These options give the buyer the right to purchase 100 shares from you at a fixed price by a specific date. In return, you earn a premium—which can serve as extra income on stocks you plan to hold but don’t expect to rise significantly in the short term.

For example: Let’s say you sell a covered call with a strike price of $110 on a stock that’s currently trading at $100. If the stock stays below $110 until the option expires, the buyer won’t exercise it—you keep both your shares and the premium you received. But if the stock rises above $110 and the buyer exercises the option, you’ll have to sell your shares at $110. You still make a profit based on the difference between your purchase price and the strike price, plus the premium. However, you’ll miss out on any additional gains above the $110 strike price.

3. Long call options

Commonly seen used for: upward-trending markets

Long call options are useful when you believe a stock's price will go up. They give you the right to buy the stock at a fixed price by a specific date, allowing you to profit from price increases without needing to invest as much as buying the stock outright. If the stock rises above the strike price plus the premium you paid, you start to see gains. If it doesn’t, your maximum loss is limited to the premium you paid for the option.

For example: Let’s say you buy a call option with a strike price of $155 on a stock that’s currently priced at $150. If the stock price rises to $165 before the option expires, you could exercise the option, buying 100 shares at $155 and selling them at the market price of $165. This would give you a profit of $1,000, minus the premium you paid for the option.

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