In times of uncertainty, like during a presidential election, global conflicts or the path of interest rates, markets can get pretty volatile.
In this article, we’ll break down how you can use Robinhood’s options trading platform to protect your portfolio from potential risk and even potentially take advantage of market swings.
Understanding market uncertainty
Market uncertainty often stems from unpredictable events that can cause big swings in investor sentiment and market volatility.
Election volatility. US presidential elections are a prime example of how potential policy changes, political rhetoric and economic promises can shake up the market. Close or contested races can increase the volatility, as investors adjust tax, trade and economic policy expectations.
Geopolitical risks. Conflicts create uncertainty in global markets, especially in sectors like energy, defense and technology. These events can cause unpredictable price swings due to shifts in commodity prices, defense spending and trade disruptions.
Interest rate changes. Interest rate adjustments can have a big impact on the markets by affecting borrowing, spending and investments. Higher rates tend to lower stock and bond valuations, while lower rates can boost investments by making it cheaper for businesses and individuals to finance projects.
The role of options trading in managing risk
Market volatility brings both risks and opportunities, and options allow traders and investors to potentially hedge against losses or profit from price movements. Options are contracts that give the buyer the right, but not the obligation, to buy or sell an asset at a set price by a certain date. This flexibility allows traders to hedge against market moves.
How options help hedge risk
Options can protect your portfolio from downturns in a volatile market.
Buying put options allows you to limit how much you stand to lose if the market drops sharply, while call options help you capture upside potential without owning the asset outright.
Hedging with put options to protect against market declines
Put options let you secure the ability to sell your stocks at a specific price, providing a hedge against market downturns.
How to use put options on Robinhood
If you’re worried about a market downturn, put options can act as insurance by letting you sell a stock at a specific price, even if its value drops.
Real-world example Ahead of an upcoming US presidential election, you might expect volatility in tech stocks, which are sensitive to regulatory and tax policies.
By purchasing puts on these stocks through Robinhood, you can protect your holdings even if the market reacts negatively to the election outcome.
Using call options to capitalize on market upside
Call options are a strategic way to take advantage of potential market rallies without committing a lot of capital upfront.
How call options work
If you believe something like an election result, interest rate change or geopolitical development could spark a market rally, call options allow you to benefit from the upside without a significant initial investment.
Real-world example If a pro-business candidate is expected to win an election, you might anticipate a rally in financial or industrial stocks. By buying call options on these sectors through Robinhood, you stand to benefit from any post-election market surge while limiting your risk.
Combining strategies to manage risk
On Robinhood, you can also use advanced strategies like the long straddle to manage risk during uncertain times.
What is a long straddle and how does it work?
A long straddle involves simultaneously buying a call and a put on the same stock with the same strike prices and expiration dates.
This strategy aims to profit from up or down price movements, whether the stock rises or falls.
Real-world example Suppose you’re unsure how a company’s stock will react to upcoming election-related regulatory changes. You could buy both a call and a put option on the stock. If the stock makes a big move either way, one of the options will likely generate enough profit to offset the cost and potentially generate a profit.
Key advantages of trading options on Robinhood
Robinhood offers a variety of features that make options trading accessible to beginners and powerful for more advanced traders.
No per-contract fees. Trade stock and ETF options without worrying about per-contract fees, so users can implement their hedging strategies without cutting into profits.
Simple interface with advanced trading tools. Robinhood’s platform is user-friendly, and with features like Strategy Builder, watchlists, advanced options strategies and the free Robinhood Legend desktop trading platform, you can fine-tune your trading.
Tax-advantaged options trading. Trade options in a Robinhood IRA and enjoy a 3% IRA contribution match with Robinhood Gold — or 1% without. Terms apply.
Risks to consider when trading options
While options trading can offer great opportunities, it’s important to understand the risks involved.
Complexity and timing.Options trading requires a solid grasp of market movements and timing. If you misjudge the timing of an event such as an election result, you could lose the premium you paid for the option.
Market volatility. Geopolitical tensions or surprise election outcomes can lead to extreme volatility. While options can help manage risk, they don’t eliminate it entirely. It’s important to stay informed and have a clear strategy in place.
Prepare your portfolio for uncertainty with Robinhood Options
During uncertain times, markets can change quickly. Robinhood’s options trading gives you the tools to potentially hedge against risks and the flexibility you need to manage your portfolio in volatile markets.
All investments involve risk and loss of principal is possible.
Robinhood Financial LLC (“RHF”) (member SIPC), is a registered broker dealer. Robinhood Securities, LLC (“RHS”) (member SIPC), is a registered broker dealer and provides brokerage clearing services. Gold membership is offered by Robinhood Gold LLC. Subscription fee applies. All are separate but affiliated entities. Options trading entails significant risk and is not appropriate for all customers. Customers must read and understand the Characteristics and Risks of Standardized Options before engaging in any options trading strategies. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including the potential for losses that may exceed the original investment amount.
Robinhood Financial does not guarantee favorable investment outcomes. The past performance of a security or financial product does not guarantee future results or returns. Customers should consider their investment objectives and risks carefully before investing in options. Because of the importance of tax considerations to all options transactions, the customer considering options should consult their tax advisor as to how taxes affect the outcome of each options strategy. Supporting documentation for any claims, if applicable, will be furnished upon request.
Matt Miczulski is an investments editor at Finder. With over 450 bylines, Matt dissects and reviews brokers and investing platforms to expose perks and pain points, explores investment products and concepts and covers market news, making investing more accessible and helping readers to make informed financial decisions.
Before joining Finder in 2021, Matt covered everything from finance news and banking to debt and travel for FinanceBuzz. His expertise and analysis on investing and other financial topics has been featured on CBS, MSN, Best Company and Consolidated Credit, among others. Matt holds a BA in history from William Paterson University. See full bio
Matt's expertise
Matt has written 191 Finder guides across topics including:
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