Options Strategies for Income: Navigating High-Volatility Environments

Huge market swings have marked the first half of 2025 as tariffs and trade wars have caused the stock markets to make drastic price adjustments to account for the latest tariff status. This volatility is a major drawback for stock investors, as it weighs down stock prices by increasing the risk premium as well as making entry and exits to the market very difficult and dangerous to time. 

Despite this, many stock market investors are looking to exploit the higher volatility to enhance their returns, as noted by FirstRate Data’s Ryan Maxwell, using several key strategies : 

Selling Puts Instead of Buying Dips 

During periods of high volatility with a generally positive trend, such as the first half of 2025, investors will very often adopt a ‘buy the dips’ strategy, where they will add to their existing positions when a stock sells off. This strategy can be replicated by selling an out-of-the-money put option on the stock, therefore if the stock falls, the investor will be delivered the stock at the lower market price. If the stock does not fall in price, the option will expire and the investor will still profit from the premium received from selling the option. 

Covered Calls

The covered calls strategy exploits the higher volatility by selling out-of-the-money call options on existing stocks in a portfolio. If an investor already holds a stock, they then sell a call option at a higher price, which forces the investor to sell at the higher price (which also locks in a profit on the stock). In the event that the stock does not rise in value, the investor still collects the premium from the sale of the option.

Put Spreads and Call Spreads

An issue with the above two strategies is the potential for large unhedged losses. For example, when adopting the Selling Puts strategy, if the stock is currently trading at $100 and the put is sold at a strike of $90, there is the possibility in a volatile market that the price could gap down far below $90, causing a large holding loss. 

To mitigate against this, more sophisticated investors often use a spread strategy of hedging by purchasing an offsetting deeper out-of-the-money option. In the above scenario, the investor, in addition to selling the put option at $90 would also purchase a put option at $80 which would cap the losses on the stock to $10.  

Iron Condor – Combining Put and Call Spreads

An Iron Condor is a complex strategy, but is still manageable for individual investors, as most brokerage platforms assist in the construction of the trade.
This strategy combines both the put spread with a call spread, which results in a conservative strategy of profiting from a range-bound market. This strategy is especially effective in high-volatility environments where the elevated option premiums allow for attractive premium collection whilst the market typically fails to move as dramatically as the implied volatility suggests.

Options can be a useful tool for enhancing returns in turbulent markets, however, there are several key considerations for retail investors. 

Firstly, the margin requirements if the strategy involves selling options. Brokerages will require a capital margin to be maintained if there is a short option position, although this may be fulfilled by the existing stocks in the portfolio; the consequences of a sudden move in prices could be the forced liquidation of other assets in a portfolio to satisfy the maintenance margin requirements. Thus the investor would need to clearly set up the margin available under different market scenarios using stress tests with trading software platforms and a high-frequency data source such as QuantQuote.
Options also entail a high degree of complexity and, for retail investors, there is often significant execution risk in correctly constructing a complex trade as well as managing the ongoing position.