Options Trading Revolutionizes the Way Investors Hedge and Manage Risk in Volatile Markets

Professional traders treasure options trading to hedge risks in times of market volatility. In such periods, wild price swings mean opportunities to make money on either side of the market. Of all the financial tools available today, none comes close to options for profiting from volatile markets while keeping risks low.

If you are new to the financial markets, you are probably wondering, what is options trading? Options are trading instruments that allow an investor to trade the underlying asset at a predetermined price. It is a way to minimize risk without going into bullion coins commonly used in hedging risk.

Why Options Are Important In Volatile Markets

To understand why options are important in volatile markets, you need to know what volatile markets look like in the first place. In a volatile market, there is no trend. The market is usually choppy, meaning there is an opportunity to make money, whether long or short.

Professional traders use options to take advantage of these market conditions by allowing them to go both long and short at the same price, essentially making a profit in the ups and downs of the market. In options, this is done by executing both a put and call option at the same strike price.

How Options Trading Revolutionized Risk Management In Investing

Options trading strategies have helped traders manage risks much better, and it’s easy to see why.

You Invest A Lower Amount

One of the best ways that options trading has changed risk management in stock investing is by lowering the amount you invest in uncertain markets. That’s because it allows investors to use high leverage that may be unrealistically risky when trading the actual stock.

For instance, if the market is bearish, or there is generally a lot of uncertainty prevailing, an investor willing to risk $50,000 in the market with leverage would have to be willing to lose a sizeable chunk of it if the market goes against them.

However, if that same investor decided to trade options, they would risk something as low as $200. However, thanks to the high leverage characteristic of options trading, investors can expect the same level of return that they would were they to risk the entire $50k.

At the same time, when investing through options, such a trader can eliminate the risk entirely by making a put-and-call option at the same strike price. Essentially this would mean that for a low investment and high leverage, you can make a high return in the ups and downs of the market.

Another way that options cut the overall risk by reducing the time that an investor is in the market. Financial markets are inherently unpredictable. This means the longer one stays in the market, the more risk they are exposed to. With options, it is possible to use very high leverage and remain in the market for only a short time, reducing the risk exposure.

Options Trading Strategies

Up to this point, it is clear what options are and the advantages they present to stock traders. However, it is important to understand that there are different strategies that traders can employ and make the most of options. Some of the most common ones are as below:

• Straddles & Strangles – a strategy that entails buying call and put options equally and profiting from the up and down movements of the market.
• Iron condor – A strategy that entails two calls and two put options. It is aimed at trading markets that are directionless but have low volatility.
• Butterfly strategy – Options strategy designed to make small profits regardless of the market direction.
• Calendar spread strategy – Entails investing in long-term put options and short-term call options. Made by market-neutral investors.
• Ratio spreads – Entails buying and selling options of an asset but with different strike and expiration prices to minimize the risk.

Conclusion

Options are financial instruments that help investors minimize risks when trading volatile stock markets. The idea behind options is to give investors a chance to take advantage of volatility in the market without exposure to the underlying asset. The best thing about options is that there are multiple strategies that a trader can use and significantly reduce risk while increasing the odds of high returns.