Use Options To Profit From Extreme Risk

| September 19, 2014 | 0 Comments

options strategyThe US markets have been surprisingly stable for most of the year (so far). There have been very few really volatile periods to speak of. And, the bull market has been quite resilient.

Even September – traditionally a volatile month – has been calmer than you’d expect. The markets have remained mostly stable despite numerous international crisis spots.

Think about it…

We’ve had a major conflict between Ukraine and Russia (currently in a ceasefire). We had another significant conflict between Israel and Gaza (currently in a ceasefire). Then there’s the ongoing air offensive against ISIS in Iraq – which soon could carry over into Syria.

And that doesn’t even include the global economic and political turmoil.

Europe is dealing with deflation and a depression-level economic recovery. The economic numbers out of China and Japan have been extremely volatile. Portugal had a default at its second largest bank. Argentina had a government bond default. And, Scotland nearly voted to become independent from the UK.

Like I said… plenty of turmoil. At some point, there could be a real impact on US equities. The Fed and the solid US economy are keeping stock prices stable for now. But, there’s no telling if and when a sudden lurch could occur.

And you know how it works. It won’t be a slow buildup of volatility. It will be big, gap moves that catch everyone by surprise.

Here’s the thing…

Don’t fear those gap moves. Instead, use options to profit from them!

The most obvious way to take advantage of a big move is by using an options straddle. That is, buying the ATM put and call on a major index/ETF (or equity). The problem with straddles is they tend to be expensive.

Some other options strategies can lower the cost of the trade (but also lower the payoff). Strangles are like straddles but use OTM calls/puts. Or by using butterflies and condors, you can sell the “wings” to lower the cost of the trade.

Finally, if only using straddles is your comfort zone, then you can always try to buy straddles on a less expensive index/equity. For instance, the S&P 500 straddle may be too expensive for you, but perhaps the Russell 3000 (broad based equities) is more in your price range. Or, you can even focus on a certain sector or industry instead.

The choices are numerous and the situations vary. However, my main point doesn’t change. Instead of fearing risk, you can use options to profit off volatility instead.

Yours in Profit,

Gordon Lewis

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Category: Investing In Options

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.