2020 has been a year for the record books in many regards. When it comes to investing, history may focus on the pandemic-induced crash in March. However, the elevated volatility around the upcoming election has also been an intriguing case study for options traders, observes Jay Soloff of Investors Alley.
As options traders, there is a general need to balance money-making opportunities with appropriate risk-management measures. In some ways, volatility can make options trading easier: trading options in volatile markets can be lucrative because the market moves so much. Keep in mind, options trades can make money whether the market moves up or down. Plus, typically when you are buying options, the more the market moves, the more money that can be made.
In other ways, options trading is more dangerous. High volatility also means your trades could move against you as well. And risk protection can be expensive (like index puts used to protect your portfolio).
The key is giving your options trades a chance to succeed. That means buying options on both sides of the market (bullish and bearish). It also means having the patience to wait for those options to make money, because there’s a decent chance (if you buy enough time) that both bullish and bearish bets will work out.
Finally, it’s always smart to use proper risk management when trading. Don’t put all your eggs in one basket. Don’t spend too much on any particular trade. Be willing to roll out (extend the time on) some trades. As long as you are savvy about it, this type of market can produce plenty of big winners.
These are just some basic rules of thumb for trading options. Volatility can amplify your successful trades or make your losers look even worse. That’s why it’s always important to have a solid grasp of options fundamentals.
Learn more about Jay Soloff at Investors Alley.
