Trading strategies for profit in volatile markets

The ongoing Russia-Ukraine crisis has sent the global and Indian stock markets in a tizzy. Here’s how wars in the recent past affected S&P 500.



During periods of high uncertainty like war, markets can be very volatile. While this may be highly risky, intraday traders can use this as an opportunity to make large profits with appropriate trading strategies.

Bear in mind though that trading during such times has its own rules, and there are several tips that you can follow to maximize your chances of success.


Best Strategies for Highly Volatile Markets

Some trading strategies work best when the markets are volatile. These strategies can help you avoid losses and also gain profits.


1. Straddle Strategy

During periods of high volatility, securities may experience large changes in price within very short timeframes. One of the most common strategies used in such markets is the Straddle strategy.

The straddle involves buying both a put option and a call option on a security of the same strike price at the same expiration date. This means that you’re both betting against the security and for the security. Since it is a period of high volatility, it is likely that the security experiences significant changes in its price, which can be either down or up.

The best-case scenario when you’ve entered into a straddle is that one of your options results in profit, while the other option expires worthlessly. This will happen regardless of whether the security’s price goes significantly up or down. Hence, you don’t need to worry about it going either way as long as it experiences volatility, and in fact, you may exit positions from a place of profit.

The worst-case scenario is that the price of the security barely changes. In this case, both your options will expire worthlessly, and you will lose the entire amount. However, since the markets are highly volatile, the chances of this happening are quite less.


2. Protected Collar

Another popular way to take advantage of high volatility is through “Protective Collar”. Under the protective collar strategy, traders buy an ATM put option & sell an OTM call option of the underlying asset. This lowers risk as the put option reduces downside risk. However, the gains are limited. For example, if you hold shares of ITC currently trading at Rs.250, you can sell a call option of a strike price of Rs.300 and purchase a put option of a strike price of Rs.200. If the price rises to 300, you gain from the underlying and lose net premiums. If the price falls to Rs. 200, you lose on the underlying but gain from exercising the put option.


3. Butterfly

The butterfly is a slightly more advanced but highly effective strategy. To execute a butterfly strategy, you will need to make four bets. One with a higher price strike price, one with an ATM strike price, and one with a lower price strike price. The final bet should be made at a higher strike price or a lower strike price depending on whether you expect the security to go up or down.

The difference between the higher price and lower price strike rates from the at-the-money strike price should be the same.

The maximum profit that you can receive from this strategy is when the price at the expiry of the contract is equal to the strike price of your call (or put) depending on which bets you made.


Some tips for profiting in volatile markets

These tips can help you trade better during times of high volatility.

1. Be Selective

Volatile markets warrant more attention to your trades. The chances of losses are higher when the markets are volatile. Hence, you should think carefully before placing each trade in some securities. You want to avoid thinly traded stocks.

2. Don’t Be Overconfident

If you get a few early wins, it can easily lead to overconfidence. However, you should remember that trading is a mental game. Markets can turn either way very quickly.

3. Trade Only A Few Securities

As a rule of thumb, trade only two or three securities at once.

4. Be Content

Don’t take too many risks. Book your open positions even if the realized profit is small. Sit back if you don’t see any worthy opportunities.


To conclude:

While the Ukraine-Russia conflict is still going on, your priority as a trader should be to monitor ongoing developments. As an intraday trader, take into account the news of the day to make smarter bets. And of course, use a robust platform like PHI 1 for elevating your trading practice.

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