2 Option Trades Any Investor Can Handle
In volatile markets, buying put options is an excellent form of downside protection, says Dan Passarelli, while option straddles can be profitable regardless of market direction.
We’re here with Dan Passarelli, who’s going to talk to us about strategies for using options in a volatile market. So Dan, how do we use options to take advantage of the volatility and to protect us from the volatility?
The most natural way to use options in regard to volatility is as protection. Even conservative investors who own stock and are afraid of market volatility to the downside want to be able to protect against further declines in the market.
So what traders can do is buy a put. Maybe you own a stock at $50 a share and you want to make sure that if the stock falls below, say, $45 a share—10%—that that you don’t have any further losses.
Well, you can buy a veritable insurance policy. You can buy the 45-strike puts, which allow you to sell the stock at $45 a share no matter what happens.
That sounds like a great idea because it sort of leverages the stop loss that somebody might put on their stock if they were, say, a trader.
Yes, in fact, in my opinion, buying a put is much better than a stop loss, because when you buy a stock as an investor, you tend to hold it for awhile, and you have what’s known as overnight risk.
Every once in awhile, something happens overnight after the market is closed and before it opens again, and sometimes that can lead to a very, very big drop in the stock market.