Introduction:
When financial markets become turbulent, volatility surges, and economic outlooks turn uncertain, many investors are left feeling destabilized. Should they sell, wait, or reposition? Crisis periods—whether driven by inflation, geopolitical tensions, or trade wars—present both risks and opportunities.
Among the most powerful tools for navigating these challenging times, options stand out. They allow investors not only to hedge against market declines but also, for the more strategic ones, to actively benefit from them. Once considered complex or reserved for experienced traders, options are now more accessible thanks to decision-making tools like Options Insight, developed by Trading Central.
This article will show you how to use options to face a market crisis, with practical insights based on data and recommendations generated by the intuitive interface of Options Insight. The goal: turning the fear of downturns into a lever for controlled strategy.
Why Think “Options” When Everything Is Falling?
When markets become uncertain, volatility skyrockets, and bad news keeps coming, many investors panic. However, there are simple and effective ways to protect your portfolio—or even profit from it: options.
Options not only allow for the protection of an existing portfolio through put options, which increase in value as stocks fall, but also enable additional income generation through the sale of covered calls. A covered call involves an investor who owns a stock and sells a call option on that same stock. By doing so, the investor agrees to sell the stock at a predetermined price (the strike price) if the stock’s price rises above that level. In exchange for this commitment, the investor receives a premium, which serves as income. If the stock price remains below the strike price, the investor keeps both the stock and the premium. This strategy is typically used when the investor expects limited price movement or a slight increase in the stock price.
Furthermore, options provide the opportunity to take a position on the decline of an asset with limited risk, compared to traditional short selling. Short selling involves borrowing a stock and selling it with the intention of buying it back later at a lower price. If the stock price drops, the short seller can repurchase the stock at the lower price, returning it to the lender and pocketing the difference. However, short selling involves significant risk, as the potential losses are theoretically unlimited if the stock price rises instead of falling. In contrast, using options to bet on a stock’s decline (e.g., by purchasing a put option) limits the investor's potential loss to the price paid for the option, making it a less risky alternative to short selling.
By incorporating options into their strategy, investors can better manage volatility and preserve capital during uncertain times, allowing them to profit from both upward and downward market movements while controlling the risks involved.
What is Options Insight for?
Options Insight allows you to turn a conviction into a strategy. Whether you're looking to limit your risk, generate income or cash flow, maximize your potential gains, or focus on the probability of success, Options Insight provides the perfect solution to craft a strategy tailored to your goals. All you have to do is select a stock and your expectations for that stock on Strategy Lab.
Suppose an investor is long on Apple, but is anticipating a significant downward move and wants to protect their existing long position.
Let’s break down these strategies by first defining the elements involved.
The first strategy displayed is a long put, giving the investor the right but not the obligation to sell the underlying asset at a specified price before expiration. By purchasing a 210 strike put option for $10.05, the investor gains the right to sell AAPL shares at $210, regardless of how low the market price drops before the option expires on June 20. This strategy limits the downside risk to a maximum loss of $1,005 (the premium paid) while allowing for significant profit potential if the stock price falls sharply. The break-even point for this trade is $199.95, making it an effective way to protect gains or reduce losses during market uncertainty.
The second strategy is called a Bear Put Spread which is used when an investor expects a moderate decline in the stock. It involves buying a 210 strike put for $10.05 and simultaneously selling a 200 strike put for $6.35, resulting in a net cost of $3.70. This setup lowers the upfront premium compared to a standalone long put, while capping both potential profit and loss. The strategy reaches its maximum profit of $630 if AAPL falls to $200 or below by the May 16 expiration, and the maximum risk is limited to $370. The break-even point is $206.30, making this an efficient way to benefit from a modest drop in the stock’s price.
Let’s see now how the information on the Dashboard can help us decide whether to trade or not the option.
Let’s break down each of these volatility insights:
• Implied Volatility Rank (IVR): The Implied Volatility Rank (IVR) is a widely used indicator by options traders to assess whether the current implied volatility (IV) of an asset is high or low compared to its historical range over a given period (calculated over one year). Implied Volatility is an estimate of an asset's future volatility, derived from option prices.
A high IV means options are expensive, indicating the market expects significant movement, and vice versa. Therefore, it’s more favorable to buy options when IV is low and sell them when IV is high.
• Upside/Downside Volatility Bias: This measure helps to understand the estimated directional bias of a stock, based on the implied volatility of call and put options. The upside/downside volatility bias is calculated by comparing the implied volatility (IV) of call and put options at strikes equidistant from the current stock price (or underlying asset).
A positive value indicates that puts (at 90%) are more expensive than calls (at 110%), suggesting a possible bearish sentiment, and vice versa.
• Volatility levels: The Volatility Levels widget helps investors quickly assess whether a stock's one-month IV is higher or lower than historical norms. This tool is valuable for deciding when to buy or sell options, as high volatility can mean expensive premiums, while low volatility might offer cheaper options. It allows traders to adjust their strategies based on current market conditions.
• Volatility History: The Volatility History widget displays the instrument's historical volatility (IV and HV) in a line chart over a set period. It helps investors understand past volatility trends, enabling better anticipation of future market movements and optimizing investment strategies.
• Timeline Volatility Bias: This indicator reflects how option prices may vary depending on the chosen expiration period. In general, long-term options tend to be more expensive than short-term options because they offer more time for the underlying asset to move, which increases the potential for profit. The longer the expiration period, the higher the premium, as the holder of the option has more time for favorable price changes, increasing the option's time value. This makes long-term options more sensitive to volatility and, therefore, typically more expensive.
However, short-term options can sometimes be more expensive than long-term ones due to immediate market conditions or upcoming events that create short-term volatility. For example, if there is an earnings report, a major economic announcement, or geopolitical uncertainty expected in the near future, short-term options may see an increase in implied volatility because traders anticipate significant price movement in the near term. This heightened uncertainty causes the premiums on short-term options to rise, despite their shorter time frame.
Thus, while long-term options generally have higher premiums due to their extended time value, short-term options can occasionally be more expensive when the market expects imminent volatility that could significantly affect the underlying asset's price.
In this example, we can see that the Timeline Volatility Bias is positive, somewhat biased to the left but lower than it was a week ago. This means that short-term options are more expensive than longer-term ones, but their prices have decreased over the last 7 days. Conversely, if our indicator shows a negative value, it means that the expected volatility in the long term is higher than that expected in the short term.
Moreover, this tool calculates the expected price movement for a given time in the future based on the Implied Volatility.
Finally, to help you navigate the world of options with more confidence, Options Insight offers a comparison of key indicators within the same sector. The indicator comparison tool allows you to quickly analyze the key data for options within the same sector and let you filter the data by column. This feature enables you to focus on specific metrics that are most relevant to your strategy, making it easier to identify trends and make more informed decisions based on your preferences.
Conclusion
Options Insight is a powerful and flexible solution that provides investors with direct access to advanced trading strategies, even during market turbulence. With its intuitive interface and advanced data tools, you can easily analyze volatility, compare key indicators between companies, and filter relevant information to refine your strategy. Whether you're a beginner investor seeking protection against market declines or an experienced investor looking to optimize your returns, Options Insight helps you make more informed decisions and turn market volatility into an opportunity. With this tool, you gain the flexibility to adjust your strategies in real time, maximizing your chances of success, regardless of the economic climate.
