US market correction: could index options help?
- Nerves around the US market are prompting investors to look into other markets and assets
- Defensive sectors are gaining, tech is weakening
- Index options strategies might be able to help you manage volatility and look for opportunity
The value of your investments and the income you receive from them can go up and down, and you may get back less than you invest. Any examples are for illustration purposes only.
Tech’s taken a hit and tariff tensions are unnerving the US market enough to push the S&P 500 into correction territory, having fallen over 10% from its high on 19 February.
While swathes of investors have been scared onto the side lines, others have piled into defensive sectors like consumer staples and healthcare, eager for a port in the storm. Gold has seen an influx of interest too, driving its value to over $3,000/troy oz for the first time ever.
With uncertainty around tariffs, inflation, growth and geopolitics showing no signs of abating in the short term, it’s worth remembering all the tools we have in our volatility toolkit.
Index options might be useful to hedge against market falls, find opportunity in volatility and generate income. Here are some key strategies to keep in mind:
Protective puts: hedging against further market falls
If you’ve already got a portfolio heavily populated by stocks in one market, one way to limit overall losses might be to buy put options on that market’s major indices (e.g. S&P 500, NASDAQ 100). Buying S&P 500 put options could help offset potential losses in a broader portfolio of US stocks - the idea being that, if individual shares are indiscriminately hit and fall together, the put option becomes more valuable at the same time.
Who could use it?
Investors looking for protection from any potential market drop, without selling their holdings.
Read more: Options trading essentials
Straddles and strangles: seeking opportunity in volatility
The Cboe Volatility Index (VIX) a.k.a. Wall Street’s fear gauge has calmed slightly after recent spikes but, at around 23 compared with a long-term average of 19.5, the measure is still high.
Some investors use raised levels of uncertainty to buy both a call and put on an index at the same strike price (a long straddle) or buy an out-of-the-money call and put (a long strangle) which could profit if markets make big moves in either direction.
Who could use it?
These are both volatility strategies, so they might suit investors who are unsure which direction the index will move, but think any move up or down will be large.
Read more: Volatility explained
Spread strategies: eyeing up a sector rotation?
If you think the market is moving in a particular direction, you could use vertical spreads to take advantage of trends while limiting risk. For example, if you think we are likely to see continued weakness in tech, a bear put spread on NASDAQ 100 index options (buying a put at a higher strike and selling a lower strike put) may be worth exploring.
A relative value spread, combining the above with a bull call spread on an index heavy on a sector you believe will rise, may also help.
Who could use it?
Investors looking for directional exposure with limited downside risk.
Iron condors and credit spreads: generating income in a sideways market
If you think the market is waiting for clarity and will stay rangebound, maybe ahead of a firm stance on interest rates from the Federal Reserve, it might be useful to think about iron condors or credit spreads. Selling these on indices like the S&P 500 could generate income - for example: selling a 5000/5050 call spread and a 4900/4850 put spread on the S&P 500 would profit if the index remains within this range.
Who could use it?
Investors looking for income from option premiums in a neutral market.
Read more: Trading calls and puts
Getting a handle on volatility
Whether you like the look of any of these options trading strategies, are thinking of rotating into different markets or sectors, or simply just want to stay put, knowing what you could do is half the battle. There is enough uncertainty in the markets, particularly now, so we don’t need to be piling on the pressure by scrambling around and making uninformed decisions in our portfolios.
Remember, your portfolio should always reflect your attitude to risk, your time horizon and how volatile a journey you’re prepared to put up with. If short-term noise is prompting you to make big changes that change the look of your overall holdings, take a step back and ask yourself whether that’s sense or fear talking.
Discrete calendar year performance
| 2020-21 | 2021-22 | 2022-23 | 2023-24 | 2024-25 | |
| S&P 500 | 31.4% | 13.8% | 2.1% | 26.6% | 9.1% |
As at 14 March 2025. Source: FE Fundinfo. Total return basis, in local currency. Past performance is not a reliable guide to future results.
Important information
When you invest your capital is at risk. Past performance is not a reliable guide to future results. Your investments and the income you receive from them may go down as well as up so you may get back less than you invest.
Make sure to do your own research on what investments are right for you before investing or consider seeking expert financial advice. Please note that this article is meant for information purposes only and does not constitute financial advice. Any hypothetical examples are provided for illustrative purposes only. Actual results will vary.
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Options are complex products, involve significant risk and are not suitable for all investors. You could lose more than your initial invested capital. You should only invest in financial products that match your knowledge and experience. Please review Characteristics and Risks of Standardized Options prior to engaging in options trading.