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Saturday 17 March 2018

Equity Tips,Want to profit from volatility in equity markets By TradeIndia Research 17-03-2018

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Want to profit from volatility in equity markets? Here are 5 option strategies for you.



When volatility increases, along with the risk, the opportunity to profit also increases. To profit from the market volatility one has to develop the right point of view on where volatility is heading

Volatility is an inherent virtue of markets. An active trader has to learn how to deal with market volatility. If you ask a typical trader what volatility really is, he is most likely to say “it’s the up-down movement of the market”.

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Well, it is not just that. Volatility, as measured by the standard deviation of daily returns of the index (or stocks), represents the riskiness of the market. If the volatility is increasing, it means the market swings are getting wilder and hence the riskiness of the markets.
To develop such a point of view, one can track the India VIX index and compare it with the historical levels. Also, do bear in mind that whenever any important market events such as the budget, election, corporate result announcement, RBI  monetary policy meet is around the corner the volatility always increase.
The best way to profit from the variation in volatility is by employing options strategies. The best part of option-based volatility strategies is that you need not be right about the market direction, the market can head either way, and it would not matter.
1. When you expect the volatility to increase it means the option premiums are going to increase as well, hence one needs to be an options buyer.
2. If there are more than 15 days to expiry from your trade date, then build a strangle strategy by employing 1 OTM Call option and 1 OTM Put option.
3. If the days to expiry are less than 15, then buy a straddle by employing 1 ATM call and 1 ATM Put option. This will help you benefit from the increasing premiums.
4. When you expect the volatility to decrease, it means the option premiums are going to decrease as well, hence one needs to be an option seller.
5. Sell naked deep OTM options if there are more than 15 days to expiry from your trade date, else sell OTM options that are slightly away from the ATM mark
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