Double Down: Two Strategic Options to Play the Market Selloff

In the wake of the current market selloff, characterized by heavy selling of stocks and other assets, savvy investors are looking for strategic opportunities to maximize returns. Amid the tumult, options plays have emerged as a viable strategy to navigate through the stormy waters of the investment world. Investors can make the most of these opportunities to generate profit and hedge risk through two main options strategies: Protective Puts and Covered Calls. 1. Protective Puts A Protective Put is an options strategy that allows an investor to hedge their investment in a specific stock. This approach ensures the investor will not suffer significant losses in the event of a market downturn. Buying a put option gives the investor the right, but not the obligation, to sell a specific amount of shares (usually 100 per contract) of the underlying security at a predetermined price, called the strike price, before the expiration date. If the stock price falls below the strike price, the investor can exercise the option and sell the shares at the higher strike price, limiting their losses even in a falling market. For instance, if an investor owns shares in Company X, which is currently trading at $50, they could buy a protective put option with a strike price of $45. If the share price falls to $40, the investor could exercise the option and sell their shares at $45, thereby avoiding a $5 per share loss. Protective puts, while offering a cushion against losses, come at a cost. An investor has to pay a premium to purchase the put option. Hence, it’s a strategy to be employed wisely, making sure that the potential upside justifies the premium. 2. Covered Calls On the flip side of the coin, a Covered Call strategy can also be utilized by investors amid a market selloff. This strategy involves selling call options on stocks that the investor already owns. By these means, the investor collects the premium (the price of the option) and still gets to keep their shares if the stock price stays below the strike price by expiration. For instance, suppose an investor has 100 shares of Company Y which they purchased for $20 per share. The investor could sell a call option with a strike price of $22 for a premium of $2 per share. If the stock price stays below $22 by the option’s expiration, the investor keeps the premium and their shares. If the stock rises above the strike price, the option buyer can exercise their right to buy the shares at $22. However, given that the investor sold the option for a $2 premium, the effective selling price of their shares is $24 ($22 strike price plus $2 option premium), which represents a profit from their initial purchase price of $20. The Covered Calls approach serves to generate additional income (the premium) during a market selloff. But it requires caution, as the investor risks missing out on a potential price surge, should the stock’s price go above the strike price. In conclusion, whether it’s through the protective nature of puts or the income-generating potential of calls, a strategic approach toward options plays can provide tactical advantages in a market selloff. Both strategies have their benefits and considerations and should be chosen based on an investor’s outlook and risk tolerance. Amid the current market volatility, the intelligent use of options strategies can provide an effective way to navigate uncertain times.