How to Adapt to Market Volatility in Futures and Options Trading? Strategies for F&O Trading

Whether you are invested in a short or long position in Futures and Options, adapting to market volatility can always be challenging. We suggests five exciting strategies for overcoming this challenge.

• Covered Call Strategy

By using this strategy, you can increase your profits from F&O trading. To do this, you can sell a call option for which you hold the underlying stock. This way, you can earn a premium whenever there are slight market fluctuations. For example, you may own the stocks of Company A priced at ₹2,500. Then, you can sell a call option at a strike price of ₹2,600 for a ₹50 premium. So, if the price of Company A’s stock remains less than ₹2,600, you retain the ₹50 premium.

• Protective Put Strategy

Another strategy to adapt to market volatility is the protective put. You can implement this by buying a put option for your underlying stock. This will effectively set a floor price for how far the stock can fall. For example, if you own the stocks of Company B, priced at ₹450, you can buy a put option for it at a strike price of ₹440 at a ₹10 premium. So, if the stock goes below ₹440, you can sell it and reduce potential losses.

• Long Call Strategy

This strategy can be helpful when the market is bullish, and you want to reduce your risks during a challenging time. To do this, you can pay a meagre premium and get the right to buy that stock at a predetermined price (strike price). So, if this price goes beyond your strike price, you can stand to potentially gain a significant profit in the long term.

• Short Put Strategy

If you are still wondering how to adapt to market volatility in F&O, then here is another strategy that is mainly used by seasoned investors. To implement this, you must first understand when a particular stock’s price will fall. For example, if you are somewhat sure that the price of the Compact C stocks that you hold will not fall below a particular price, then you can sell a put option for it. This means you get to keep the premium if that stock remains above the strike price.

• Straddle, Strangle, and Spread Strategies

In addition to these, you can explore more complex strategies like the straddle, strangle, and spread. During times of economic uncertainty, these advanced strategies can help you to reduce your portfolio risk to some extent. For example, when the market is volatile you can deploy a straddle (i.e., buying a call and put option for the same underlying stock at the same strike price).

Strategies for F&O Trading

You can learn how to handle market volatility in F&O by using one or more of these strategies. However, you should know that these strategies are only recommended for specific cases depending on the market’s volatility level. In some cases, you may need these strategies for portfolio diversification; in others, you may use them to minimise the risk of losses directly.

To better understand each of these strategies, here is a list of objectives, risks, and rewards for each.