InvestorQ : How should traders plan their strategy in volatile times?
Abhisha Yadav made post

How should traders plan their strategy in volatile times?

Answer
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Tisha Malhotra answered.
1 year ago


Do volatile markets have anything for traders? Actually, a lot! When the VIX is high, it gives a great opportunity for traders to participate in the volatility without taking a directional view. Normally, such volatile strategies do not work when the markets are in a range or when the VIX is below 15. In such cases your options will expire worthless and the risk-reward will be negative for you. The answer can lie in strangles and straddles. Both straddles and strangles are a great way of participating in these volatile markets. Since markets are volatile, you gain on price as well as on time value. That gives you twice the chance to be profitable on a volatile strategy. Most frontline stocks are at the cusp of a breakout and any movement will give you ample opportunity to benefit from volatility. The sharp movements will give you sufficient room to cover your cost of call and put. This can work only as long as the volatility in the market remains high and the traders can make the best of it. Of course, there are two lines of caution here. Try to play with a stop loss, which should be based on volatility rather than on price. If VIX falls below a certain level, just exit your position. Secondly, do not go too much out-of-the-money and keep your strikes as close as possible. In a nutshell, there is a lot that traders and investors can do in volatile times. Above all, it is a golden opportunity for you to restructure your portfolio. Get rid of the losers and laggards and pile on to the winners. You will be much better placed when the revival starts!