It is easy to feel overwhelmed during times of market volatility, as prices swing wildly due to headlines that are filled with fear. As a result, it may seem like the best move is to sell everything and stay on the sidelines. But volatility doesn’t have to be bad. In fact, with the right strategies, it can actually create opportunities. Therefore, here are three practical ways to manage a volatile market.
Use Options to Your Advantage
In times of market volatility, options become more expensive because of something called “implied volatility.” This is baked into the price of an option, known as the premium. When volatility rises, option premiums go up, which can work in your favor if you’re selling options instead of buying them.
One way to take advantage is by selling cash-secured puts on stocks you would be happy to own anyway. For example, if a stock you like is trading at $100, you could sell a put option at a $90 strike price. If the stock stays above $90, you keep the premium as income. If it drops below $90, you buy the stock at a lower price, which effectively gives you a discount. It’s a smart way to build a position while getting paid to wait, and it adds a margin of safety in choppy markets.
Look at Defensive Stocks for Stability
Not all stocks suffer equally during a downturn. Defensive sectors like utilities (XLU), healthcare (XLV), and consumer staples (XLP) offer essential products and services that people rely on no matter what. Companies like Johnson & Johnson (JNJ), Procter & Gamble (PG), and Duke Energy (DUK) may not skyrocket during bull runs, but they tend to hold up better when markets fall, and many pay reliable dividends. By adding defensive stocks to your portfolio, you can help smooth out volatility and provide income while waiting for conditions to improve.
Don’t Panic and Stick to Your Plan
Finally, the most important thing you can do when the market gets rough is to stay calm. Indeed, emotional decisions can lead to costly mistakes like selling at the bottom. Long-term investors know that downturns are normal and often temporary. Instead of panicking, use the time to reassess your goals, make sure your risk tolerance matches your investments, and rebalance if needed. It is important to remember that volatility is part of investing. Therefore, you have to avoid emotional traps and stick to your plan.
Defensive Sectors vs. Broad-Market Indices
According to TipRanks’ ETF comparison tool, we can see how the defensive ETFs mentioned above have performed versus broad-based ETFs like the SPDR S&P 500 ETF Trust (SPY), the Nasdaq 100-tracking Invesco QQQ Trust (QQQ), and the Dow Jones (DIA). Indeed, the defensive sectors have significantly outperformed the market benchmarks, as pictured below.
