As experienced investors are well aware, the market is dynamic and consistently evolving thanks to the array of technologies and advanced applications emerging all the time. You’ll need to develop innovative approaches driven by analytical tools to stay one step ahead and continue to make profits.
You’ll also stay informed about the current market conditions, forecasts, geopolitical factors, and macroeconomic factors to predict uptrends and ensure maximum returns. Here’s a quick overview of how to optimize your techniques.
Advanced Trading Strategies
Volatility Trading
Volatility trading is a technique where experienced investors accurately predict the market’s uptrends or downtrends.
Traders can profit from forecasting significant price changes in the upward or downward direction that can influence the value of their invested capital. Market volatility is driven by geopolitical events, climate changes, and other factors that can trigger the markets to move unpredictably.
Stocks with higher volatility carry a high risk quotient but also have the potential to earn higher returns and traders use instruments like exchange-traded funds (ETFs) and exchange-traded notes (ETNs).
Leveraged Tesla ETF is a good example of an ETF, and JPMorgan Alerian MLP ETN (AMJ) is the largest ETN featuring close to $1 billion worth of assets.
If the investor expects significant market volatility but is uncertain about the direction in which the market can go, they may use the straddle or strangle strategy.
The straddle technique involves buying a call option and a put option. But at the same strike price and expiration date. If the price volatility is enough to cover both options’ costs, the trader makes a profit.
On the flip side, if the asset’s strike price is higher than its current market price, traders can exercise the out-of-the-money option (OTM) and put options. This technique is only profitable if the trader anticipates significant market volatility in the upward direction.
Option Spreads Trading
Experienced investors may also engage in buying and selling multiple options at the same time to build a more complex portfolio.
These advanced trading strategies allow them to offset and balance some of the risks while also enhancing potential returns and making money.
Some of the options you can exercise are:
- Calendar spreads are also called time spreads since they involve purchasing and selling stock options but with varying expiration dates. Traders leverage this technique to benefit from stock uptrends and downtrends in the short term and long term. It is typically suitable for investors who are risk-averse and open to earning lower returns. A typical calendar spread may feature a combination of longer-term contracts but going short with shorter-term options at the same strike price.
- Vertical spreads involve purchasing and selling stock options with similar expiration dates but at different strike prices. Bullish traders expecting the market to appreciate significantly may prefer to use the bullish call spread strategy. Bearish traders anticipating a downtrend may go with bearish put spreads. This technique has a higher probability of making a profit, and the risk factor is low unless the stock market experiences a significant downtrend.
- Butterfly spreads are yet another approach that experienced investors use. This technique involves a balance of bullish and bearish options. While the risk factor is limited, you should also be prepared for a cap on the profits. Traders who expect the stock market to remain stable with minimum volatility typically use this strategy. When using the butterfly spread, you’ll purchase a call option at a lower strike price and sell two call options at a higher strike price. Next, you’ll purchase yet another call option but at a higher strike price.
- Iron condor techniques are suitable for experienced investors anticipating stable markets with low volatility. To exercise the iron condor, you’ll exercise a long put option and a short put option, along with a long call option and a short call option. You’ll also get four strike prices, but all with the same expiration dates. Expect to earn small profits, but the risk factor is also low.
This post is designed to give you a quick overview of how to purchase and sell stock options and how market volatility works. However, advanced trading strategies are complex and involve experience and expertise that only advanced investors may have. Relying on the experts for advice is always a smart move.
