Trading in a volatile market

While investors are sitting around waiting for the market to make up its mind about the direction in which it is heading, investors might find a different way to earn good rates of return.

When the market has a pullback like the one in March, volatility tends to increase and the market gets choppy. It could be hard to make money from trading stocks directly. It might the time for writing options because volatility increases premiums. Writing options to earn premium is an obvious strategy, since it takes advantage of a fact many traders forget: most options expire worthless.

Writing options normally involves a larger risk than buying them because when investors sell options to earn a premium, their loss is not limited as it is when investors buy options. Buy an option and investors can't lose more than the premium. Sell options and investors can potentially lose much more than the premium they earn.

But suppose investors think the market is trading within the range of exercise price, or a slight rise in the market is more likely. If investors have cash ready to invest in share, they can write a put options again this cash position. Now if the market does trading within the range or rises as expected, investors will earn the premiums, and if it falls investor agree to buy shares as a price which is below the current price.

Since assume to want share because of the cash position, investors don't mind if the market falls for being exercised the put. Investors simply buy the shares in lower price. On the other hand, if the market does rise, this is still a favourable result because investors will earn the premium.

(This article is for my own reference only.)