Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Investment and Options Strategist
Summary: This article provides strategic guidelines for navigating the volatile fall 2024 markets, focusing on premium-selling and premium-buying options strategies, while emphasizing the importance of careful timing, risk management, and selecting market-neutral approaches to capitalize on heightened volatility.
As we move into the fall of 2024, financial markets have shifted from a nearly year-long bullish trend into a more volatile and unpredictable phase. The sharp correction in mid-July, followed by a spike in volatility in early August, has left investors and traders grappling with heightened uncertainty. Historical patterns, as seen in the attached VIX seasonality chart, show that volatility typically rises during the second half of the year—especially in U.S. election years—and 2024 is no exception. The VIX and other volatility indicators, such as VXN (tech sector volatility), OVX (oil), and VXTLT (bonds), have all been on the rise, with individual stock and commodity volatilities following suit.
The purpose of this article is to provide strategic guidelines for traders and investors navigating this volatile market environment. Whether you are looking to hedge your portfolio, generate income, or take advantage of potential price swings, adapting your approach to reflect current market conditions is essential. These guidelines are designed to help you assess and manage risk, and identify opportunities within both premium-selling and premium-buying strategies. The key is to recognize that volatility presents both risks and opportunities, and the right approach will depend on your goals, market outlook, and experience.
However, it's crucial to recognize that the rest of this article is based on the market conditions as they are right now. The financial markets are inherently unpredictable—volatility might increase further, or it could drop to historically low levels. We've seen time and again that market sentiment can change quickly and in ways that defy forecasts. Given this unpredictability, the strategies outlined in this article are designed to prepare you for the possibility that volatility remains elevated in the short to medium term.
It’s also important to stress that the strategies listed below assume you have adequate knowledge and experience to use them. Options trading carries risks, and it is essential to fully understand the mechanics and risks involved before putting these strategies into practice. If you’re unfamiliar with any of the concepts discussed, further education and due diligence are absolutely necessary before considering the use of these tools. Always do your research and ensure that you understand the potential risks and rewards of any trading strategy.
That said, in light of the current high-volatility environment, the following guidelines can help you better navigate and potentially profit from the unpredictable market conditions—if volatility persists into the near future.
When volatility increases, so do the premiums on options. As a result, premium-selling strategies become particularly attractive. Selling options allows you to capture this increased premium, as time decay works in your favor, and you profit if the underlying asset doesn’t move significantly in either direction.
What to focus on:
Why it works:
How to execute:
Risks to consider:
While selling premium can seem like the more obvious play in a high-volatility market, buying options remains a viable strategy—especially if you're expecting a strong directional move. However, with options trading at higher prices due to increased implied volatility (IV), you need to be more selective and strategic to make option buying work in your favor.
What to focus on:
Why it works:
How to execute:
Risks to consider:
Whether you are buying or selling options, it’s crucial to understand how market volatility affects the Greeks, particularly theta (time decay) and vega (volatility sensitivity).
Theta: As an option buyer, time decay will erode your position’s value if the underlying asset doesn’t move fast enough. This makes it critical to time your entry and consider longer-dated options. For sellers, theta is your friend—time decay works in your favor, especially with near-term options.
Vega: Rising volatility increases the value of options, benefiting buyers if IV rises after you’ve entered the trade. However, sellers need to account for the risk of further volatility increases, which can inflate option values.
How to navigate:
Given the unpredictable market conditions, where a strong directional bias could lead to unwanted losses, incorporating market-neutral strategies can help you profit from volatility without taking on excessive risk.
Strategies to consider:
Risks to consider:
This is true for both premium sellers and premium buyers. Given the elevated implied volatility across many sectors, it’s essential to be selective about the assets you trade. Not every stock or commodity will move dramatically, and volatility across sectors can vary.
How to execute:
Risks to consider:
Fall 2024 presents a complex but opportunistic market environment. With volatility rising, both premium-selling and premium-buying strategies offer paths to success—but only if carefully adapted to current conditions. Selling options allows traders to capitalize on elevated premiums and time decay, but option buying remains a viable approach when paired with selective timing, longer time frames, and proper risk management.
By combining thoughtful timing, selective underlying choices, and the appropriate mix of buying and selling strategies—while keeping a close eye on the risks—traders and investors alike can navigate the volatility ahead and position themselves for potential gains, regardless of the market's direction.