Smart Investor - Tariff turmoil: how to use options to hedge, trade, and profit from market volatility

Tariff turmoil: how to use options to hedge, trade, and profit from market volatility 

Key points:

• Markets are reacting to Trump’s new tariffs, with more volatility expected.
• Tariffs on Europe are likely next, adding further uncertainty.
• Markets could drop further, stabilize, or rebound—we’ll cover options strategies for each scenario.

Introduction

The markets are reeling after Trump’s latest tariff announcement, with futures plunging overnight. But now, as the market approaches the open, the selloff appears to be slowing—or at least stabilizing. The question every active investor is asking: what happens next?

Should you panic and sell your stocks? Probably not.
Should you hedge against further downside? Possibly.
Is this a buying opportunity? Maybe—but with caution.

This is where options become an essential tool. Instead of making an all-or-nothing decision, options allow you to adjust your portfolio based on different market scenarios—whether it’s protecting existing positions, profiting from further downside, or positioning for a recovery.

In this article, we’ll explore three possible outcomes:

1. Markets keep dropping – how to protect or profit.
2. Markets stabilize – how to generate income from high volatility.
3. Markets rebound – how to position for recovery with options.

Let’s break it down.

Important note: The strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.

Scenario 1: Markets continue dropping – how to protect or profit

If futures are any indication, the market is set to open significantly lower. But just because the initial panic has subsided doesn’t mean the selling is over. If the decline resumes, here’s how to use options to hedge or capitalize on more downside.

Hedging existing long positions

If you’re holding stocks—especially in high-beta sectors like tech—you may want to protect your portfolio without selling your positions. Here’s how:

• Protective puts: Buy puts on stocks or ETFs you own to create a safety net. For example, if you own 100 shares of stock ABC trading at $100, you could buy a $95 put expiring in one month to limit your downside risk. This ensures you can sell your shares at $95 if the stock falls further.
• Put spreads: To lower costs, use a bear put spread (buying a put and selling a lower-strike put). If you expect limited downside, this can be more cost-effective than a single put. For example, if stock ABC is trading at $100, you could buy a $95 put and sell an $85 put, both expiring in one month. This reduces your cost while still allowing you to profit if the stock drops.

Profiting from further downside

If you believe there’s more pain ahead, there are ways to profit from the decline:

• Long puts on weak stocks or ETFs: Buying puts on weak sectors (like a tech or financials ETF) allows you to directly profit from further downside. For example, if a sector ETF is trading at $200, buying a $190 put expiring in three weeks can provide leveraged downside exposure.
• Bear call spreads: If you think the market will grind lower rather than crash, selling a bear call spread (sell an at-the-money call, buy a higher-strike call) can generate premium while limiting risk.

Scenario 2: Markets stabilize – how to generate income from high volatility

After an initial selloff, markets sometimes find a temporary floor and trade within a range. This can happen when investors pause to reassess the situation, waiting for more clarity before making their next move.

If the market stabilizes but doesn’t rebound sharply, implied volatility (IV) will likely remain elevated. This creates an opportunity: selling options to generate income while the market consolidates.

Using high volatility to your advantage

When market uncertainty spikes, options premiums increase due to higher IV. If you believe prices will remain range-bound, selling options can allow you to capitalize on inflated premiums.

Income-generating strategies in a sideways market

Here are some ways to take advantage of a market that isn’t moving significantly in either direction:

• Iron condors: If you expect the market to stay within a defined range, selling an iron condor allows you to collect premium from both calls and puts. This strategy involves selling an out-of-the-money (OTM) put spread and an OTM call spread, profiting as long as the underlying stays within the range.
• Credit put spreads: If you think the market is more likely to drift sideways or slightly higher, selling a bull put spread (sell an OTM put and buy a further OTM put) lets you collect premium while limiting risk. For example, if stock ABC is trading at $100, you could sell a $95 put and buy an $85 put, both expiring in two weeks, to generate income.
• Covered calls: If you own shares and believe they will trade in a range, selling covered calls can generate income. If the stock rises above the strike price, you may have to sell your shares, but if it stays below the strike, you keep both the stock and the premium.

Scenario 3: Markets rebound – how to position for recovery with options

After an initial selloff, markets sometimes find support and stage a recovery. Whether it’s a sharp rebound or a slower grind higher, options can help traders participate in the upside while managing risk.

Positioning for a rebound with limited risk

If you believe the market is likely to recover, these strategies can help you take advantage of the move without excessive risk:

• Bull call spreads: Instead of buying calls outright, a bull call spread (buying an at-the-money call and selling a higher-strike call) reduces the upfront cost while still allowing for upside participation. For example, if stock ABC is trading at $100, buying a $105 call and selling a $115 call, both expiring in one month, lowers the cost while targeting a potential move higher.
• Selling cash-secured puts: If you’re willing to buy shares at a lower price, selling an out-of-the-money put lets you collect premium. If the stock stays above the strike, you keep the premium; if it drops below, you buy the stock at a discount.
• Ratio call spreads: If you expect a moderate move higher but not a massive rally, a ratio call spread (buying one call and selling two higher-strike calls) can reduce cost while benefiting from a controlled upside move.

Final thoughts: staying flexible with options

Markets are unpredictable, especially after major news events like the recent tariff announcement. And this isn’t the end of it—Trump has already stated that tariffs on Europe are next, meaning more volatility is almost guaranteed.

But volatility doesn’t just mean the market will go down. It means movement—up, down, or range-bound. Instead of guessing the direction, options provide a way to stay flexible, hedge risk, and generate income under different market conditions.

• If the market keeps dropping, protective puts and bearish strategies can help.
• If the market stabilizes, selling options can generate income from elevated volatility.
• If the market rebounds, bullish strategies can capture upside without excessive risk.

No single strategy fits all situations, but by using options effectively, traders can adapt to changing conditions and make informed decisions—rather than reacting emotionally to market swings.

Stay tuned for market updates, read our daily market quick takes, don’t panic, and explore how you can counteract these challenging times with the right options strategies.