Most investors know that the market faces periods of both bull and bear market. So what happens during the time of high fluctuations? Taking the wrong decisions could simply wipe out previous gains and even many more. So this article is at your rescue. If you are wondering about how to profit from stock market volatility, then let us have a look at the volatile market investment strategies that you can use to gain even in volcanic situations.
By utilizing either probability-based or non-directional trading avenues, investors may be able to safeguard their assets from losses and may also be able to earn profit from rising fluctuation using several strategies. So without any further delay, let us begin with this article that will talk about the volatile market investment strategies.
Volatile Market Investment Strategies: Fluctuation Vs Risk
Before we get into trading strategies for volatile markets let us first understand the difference between risk and volatility. It is crucial to understand the variation between risk and volatility before planning on a trading methodology. Fluctuation in the financial space is the quantification of the magnitude and speed of the price swings of an asset. Any asset that witnesses its market value shift over time, has some level of fluctuations. The greater the fluctuation, the bigger and more frequent these swings are.
Risk, on the contrary, is the chance of losing some or all of an investment. There are various types of risk that can lead to a loss, that include market risk.
As the fluctuation of the market rises, market risk also tends to rise. In response, there can be a noticeable increase in the volume of trades at the times of these periods and a corresponding reduction in the holding periods of positions. Along with that, hypersensitivity to news is at times reflected in values during times of high volatility as the market overreacts.
Thus, raised volatility can correspond with bigger and more frequent downswings, which offers market risk for investors. Luckily, fluctuations can be dodged away to some degree. Along with that, there are ways to really profit directly from fluctuating increases.
Volatile Market Investment Strategies: Hedging Against Volatility
Another volatile market investment strategies involve hedging against market fluctuations. Perhaps the most crucial thing for most long-term investors is to dodge downside losses when markets fluctuate. One way to perform this, of course, is to sell shares or create stop-loss orders to automatically sell them when values decrease by a certain amount. This, however, can formulate taxable events and, moreover, eliminate the investments from the portfolio of investors. In the case of a buy-and-hold investor, this is often not the best thing to do.
Instead, investors can purchase protective put choices on either the single stocks they hold or on a wider index like the S&P 500. A put choice offers the holder the right to sell their shares of the underlying as a set price on or prior to the contract expires. Imagine that XYZ stock is trading at $100 each share and you wish to safeguard against losses beyond 20 percent. You can purchase an 80 strike put, which grants you the right to sell shares at $80, even if the market slips to, say, $50. This effectively sets a price floor.
Volatile Market Investment Strategies: Trading Volatility
Investors who want to take a directional bet on fluctuation itself can trade ETFs or ETNs that track a fluctuating index. One such index is the VIX (Volatility Index) formulated by CBOE which tracks the fluctuation of the S&P 500 index. Also known as the “fear index,” the VIX rises in value when fluctuation also increases.
You may also think of purchasing options contracts to profit from increasing volatility along with hedging your downside. Options values are closely connected to volatility and will rise along with fluctuation. Because fluctuating markets can lead to swings both downwards and upwards as values whirl, purchasing a straddle or a strangle are among the best options strategies for volatile market. These both include simultaneously purchasing a call and a put on the similar underlying and for the same expiration. If prices shift a great deal, either volatile market investment strategies can increase in value.
With that let us wrap up by knowing what causes a volatile market. In general, market volatility rises when there is bigger fear or more uncertainty among investors. Either can be an effect of an economic downturn or in response to geopolitical incidents or disasters. Volatile market examples include, market volatility increased due to the credit crisis in 2008-09 that led to the famous great recession. It also increased when Russia invaded Ukraine this year. So what do you do in these situations? In the above article, we have elaborated on the various volatile market investment strategies. As an investor, if you follow these then you can get the best investments for volatile market.