Traders should consider these developments as a signal to reassess their portfolios and strategies. In times of increased market uncertainty, having a well-balanced approach that includes hedging positions can be crucial. A conventional reaction is to sell everything and pile into more ‘secure’ assets like gold and government debt.
There are other strategies of course.
Options traders moving to the short side
Buying puts, which have the added benefit of not being subject to liquidation, to protect against downside risks while maintaining liquidity on hand can help manage potential volatility effectively.
Put options, which are available to retail investors, provide the owner the right to sell a stock at a predetermined price, also known as the strike price. They increase in value as the underlying asset – for example a stock – goes down in price. Not only that, they can be used to lock in the value of a falling asset by ensuring you can still sell it at the strike price, even if it goes lower.
Following the major market sell-off, Lyra, which is an advanced DeFi platform used for simple and accessible trading, said it has noticed a significant shift in trader sentiment, with one of its biggest Sunday volume days ever recorded of $40 million.
Trading activity on Lyra has shifted from a 75%/25% calls/puts ratio to 60% puts and 40% calls, reflecting a more cautious market outlook. Traders have been actively buying 2000 and 2500 strike puts, with expiries at the end of Q3 (September 27, August 30). This suggests a strategy to hedge against more potential market volatility in Q4.
The recent major market sell-off has heightened uncertainty. And the significant shift in trader sentiment on Lyra and other platforms, suggests that traders are preparing for even more potential market volatility as we approach the end of Q3. A potential US recession, the upcoming election and anticipated rate cuts are also likely contributors to this cautious outlook.
“Lyra has witnessed one of its highest Sunday trading volumes to date of $40 million in notional volume, driven by the substantial declines in ETH/BTC prices and market sell-off over the past week, said Nick Forster, the founder of Lyra. “This activity reflects a strategic shift among traders from predominantly buying calls to a more balanced approach, now leaning towards puts. It highlights their efforts to hedge against potential market downturns and ensure liquidity in the face of anticipated market fluctuations.”
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A buying opportunity for stock traders?
Meanwhile, the yield on the policy-sensitive US Treasury two-year note decreased by more than 25 basis points this week, while gold prices approached record highs, reflecting increased investor risk aversion. The shifts in global markets have prompted investors to reevaluate their strategies in light of the US Federal Reserve’s September rate cut plan.
In this volatile environment, savvy investors are turning their attention to top-up their portfolios with high-quality equities at lower entry points. High-quality stocks, typically characterized by strong fundamentals, consistent earnings growth, and robust balance sheets, will be in focus as they offer a measure of stability and potential upside even amidst broader market turbulence,.
“Companies with established market positions and reliable cash flows are better equipped to weather economic slowdowns and maintain dividend payments, making them attractive to risk-averse investors,” said Nigel Green, CEO of the deVere wealth management group.
Look out for undervalued companies
Market sell-offs can create opportunities to acquire high-quality stocks at attractive valuations. As fear and uncertainty drive prices lower, astute investors identify undervalued companies with solid fundamentals, positioning themselves for gains as market conditions stabilize.
Maintaining a diversified portfolio across sectors and geographies will mitigate risks associated with market volatility. Emphasizing companies with strong balance sheets, consistent earnings growth, and competitive advantages will enhance portfolio quality and resilience. Rigorous fundamental analysis is crucial in identifying stocks that offer long-term value.
During times of turbulence, regularly reviewing and adjusting portfolio allocations in response to changing economic indicators and market trends can also optimize performance. By focusing on companies with robust fundamentals and long-term growth potential, savvy investors can not only weather the storm but also position themselves for future success as economic conditions evolve.
Therefore, this turbulence will be seen by many as a major buying opportunity.
