In investment sector volatility is seen as a risk, but in reality, it is a part of the trade market. Risk is not that happens always but a thought of what may happen. Therefore, likening volatility with risk will not work.
True risk is the opportunity for permanent capital loss. If an underlying stock shows a 50% net gain over 5 years then imagine the times value wildly fluctuated, so this is a great good long-term return. Besides, if you traded the stock during an extreme dip within that period the scene would be entirely different. However, over the long term, the underlying stock showed a good 50% net gain on investment. So, volatility is a synonym for potential losses [risks] for the short term and not for the long term.
Volatility is an investment opportunity for the long term. Choose options trading that offers investors the right to sell or buy an underlying stock at a specific price with an expiry date. You can learn how to leverage volatility for gain on trading forum platforms like Steady Options.
Options strategies are like owning an insurance agency. People spend a lot on home insurance premiums with the knowledge that the chances to file a claim are 1%. Insurance providers earn a profit from these paid premiums. In the same way, options on volatility can be used to earn a side income from underlying assets with limited risk.
Sell options to attach market index volatility. Over the long term, you can earn profits based on index fluctuations. According to market index performance of the last four to six decades, the longer the strategy the risk for capital’s permanent loss reduces.
For options, there are two types of volatility.
- Implied volatility [IV] – Market participants predict how much the underlying securities will move in the future. It is a real-time estimation of an asset value as it trades. When there is a downtrend the IV increases and vice versa. High IV means the price movement expected is high in future.
- Historic Volatility [HV] – It is also called statistical volatility. It measures the speed of price change across a specific period. HV is calculated every year because there are constant changes. It can be calculated daily for short time frames. Higher the HV percentage the higher the option’s value.
Underlying assets’ long-term volatility is believed to be mean-reverting. Based on some fundamental volatility’s average level is suggested. If the volatility level is too high above this average then there is a decline but if it is too below then there is a surge.
With rising volatility, the options prices increase, so buy contracts to earn profit from surging price swings. Markets can move in either direction with high volatility, so buy strangle or straddle because both are indifferent to market directions.
If volatility is moving downwards, then earn profit from selling options. Remember never to sell naked options [unhedged] because it is highly risky.
Investors need to be patient while investing in a long term strategy. Slow and steady is the approach that can bring good profit even from harnessing volatility.