There are numerous reasons for volatility in the stock market
like now a days coronavirus is ruling the market, and it should be
accepted as the underlying reality of investing.Timing the market is not
easy and if you are not confident about taking advantage of volatility, you
should avoid it.
As an asset class, stocks are volatile by nature. There are
numerous reasons for volatility in the stock market and it should be accepted
as the underlying reality of investing. Unless there is a market-wide consensus
of the future, a trend cannot be in place and until a trend is in place,
markets will always be volatile. Every trader/investor should be equipped with
strategies to make profits in such uncertain scenarios. Here are the top five
ways to make money in a volatile market:
1. Options Strategies –
There are several ways of making money in volatile scenarios using options
strategies. Some popular strategies include short straddles, short strangles,
iron condor, covered call etc. Any strategy which involves selling either at
the money or Out of The Money (OTM) or At The Money (ATM) options with an
expectation that the market direction will not change much and the options
premiums will decay significantly or expire worthlessly, thereby generating
profits for the writer. Selling options in volatile scenarios can be very
tempting but it is extremely important to be hedged, otherwise, the downside
could be higher if you are wrong. 4 legged options strategies such as Iron
Condor and Iron butterfly give you the perfect hedge. It is a good strategy to
enter these strategies across different stocks with low correlation so that you
have a higher probability of success. A covered call is a very effective and
yet simple strategy that works very well. In fact, it is designed to make the
maximum amount of money in moderately volatile markets where the price of the
underlying is within a tight range and the options premiums are high. Executing
covered call strategy successfully over a period of time helps generate extra
returns on a stock.
2. Have a long & short exposure –
When there is no clear direction and when the market can go either way, it is
not always sensible to have a 100% long-only portfolio. It is much wiser to
have a percentage of your capital in short trades. The ideal case would be if
you are long strong/bullish stocks and short weak/bearish stocks during the
volatile phase. When going short, choose the weakest stocks from the weakest
sectors. Generally, despite having fallen a lot already, their downtrend will
continue if the overall market sentiment is uncertain. This is a rule of thumb
but must be exercised with caution as shorting requires a level of skills that
can be skillfully executed by active traders only. While having a short
exposure, it is extremely important to be aware of the range of stocks as
entering trades at the wrong prices can completely disrupt the profit
potential. The long/short ratio should depend on your outlook of the market.
For instance, if you are moderately bullish, then the long/short ratio should
be in the range of 65:35 or so. A balanced approach such as this will help play
market fluctuations more effectively. If you are not savvy with these concepts,
it is best to withdraw a certain portion of your long portfolio and park in a
less correlated asset class such as gold or fixed income.
3. Rupee Cost Averaging –
Contrary to popular wisdom, averaging your positions can be very beneficial
during volatile markets. Averaging is good, but averaging with leverage is a
sin. Leverage changes the equation dramatically because the margin of error
reduces substantially and also the waiting power is extremely limited. Hence,
the odds are stacked against a trader who averages against the trend with
leverage. That aside, if you can buy equity every time the market corrects within
a range, then you will accomplish lower buy averages and that’s a good thing
for your portfolio.
There are two ways of doing this; you can either sell your
existing holdings at the highs and re-purchase them at lower prices and play
the range or you can infuse additional capital which can help improve the
average purchase prices. If you can do this successfully, you will be operating
within a margin of safety as long as the markets are within a range. A classic
example is SIP investments during volatile markets is a great strategy.
