Volatility just dropped, could index options work for you?
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. Please bear in mind that options are complex products, involve significant risk and are not suitable for all investors. You could lose more than your initial invested capital.
It’s been a jumpy old year so far. DeepSeek unsettling the AI trade, the dizzying US tariff narrative and conflict in the Middle East have all made for a volatile stock market atmosphere in the first half of 2025.
And, while we haven’t seen the end to any of the above just yet, the market’s heading into the summer feeling a bit calmer. Research this week from Cboe [1] showed nerves are steadier across the board as the world prices in cooling geopolitical tensions and better-than-expected economic updates.
Read more
2025 half-year investment outlook
How does the oil price affect my investments?
Consumer stocks are the latest market barometer
The oil price has taken a breather thanks to a ceasefire between Iran and Israel, and happier inflation prints have eased interest rate volatility. Even gold, which has risen 19.2% over the past six months as investors look for a place to hide, has seen its swings moderate. US stocks have been a beneficiary of confidence seeping back into markets, with the S&P 500 up 4.5% to new highs over the past month.
Discrete calendar year performance
| 2020-21 | 2021-22 | 2022-23 | 2023-24 | 2024-25 | |
| S&P 500 | 25.3% | 1.2% | 13.7% | 24.7% | 5.8% |
| S&P GSCI Gold Spot | -14.1% | 15.3% | 1.5% | 21.3% | 35.2% |
As at 30 June 2025. Source: FE Fundinfo. Total return basis, in sterling terms. Past performance is not a reliable guide to future results.
Importantly, the VIX (Wall Street’s ‘fear gauge’) fell to a four-month low at the same time, even with the 9 July tariff talk deadline looming. Volatility tied to trades around the date hasn’t budged much, which could be a sign that the market expects a straightforward outcome after 90 days of talks or that a new deadline might be announced. It could also mean complacency is setting in, potentially paving the way for a gnarly market if it all doesn’t go as swimmingly as implied.
Eerie market calm: time to consider index options?
It’s tempting to let our desire for a smooth and steady investment journey obscure the near-term risks. Yes, over the long term it’s not a bad idea to let the market work out the kinks - history shows us as much. But, we shouldn’t forget that volatility is the price we pay for the hopeful outperformance of stocks over cash. Just because the market is feeling chirpier now, we shouldn’t expect that to last for the next six months, if the previous half year is anything to go by.
Read more
Trading calls and puts
Getting started with options
Introduction to index options
Here are four index options trading strategies to have in your back pocket, whether you’re hoping to hedge against any emerging volatility or planning to use it as an opportunity to trade.
1. Protective puts: adding in portfolio insurance
If you think the market’s latest relief run could face a pullback, a protective put might be able to help you hedge your downside.
By buying a put option on an index like the S&P 500, you essentially create a floor to your losses. If the index were to fall below a certain level (your strike price), your put would increase in value, offsetting losses elsewhere in your portfolio. You’ll be paying a premium for that peace of mind but if you think earnings season could bring some nasty surprises or trade negotiations could mar the market, it may be worth it.
2. Long calls: taking part in the market rally and limiting risk
If you think the current backdrop points to the market rising from here, buying a call option on an index is one way to try to profit. A call option gives you the right to profit if the index moves above your strike price before a certain date. If that happens, your call becomes more valuable. If it doesn’t you don’t lose everything, just the amount you paid for the option (the premium). It can be a popular route for investors who want to take advantage of a potential market rally but don’t want to commit a lot of cash or take on too much downside risk.
3. Spreads: structure your view with control
Options spreads combine a set of options into one trade. The goal here is to let you express your view on the market - whether you think it’s going up, down or sideways - in a way that also looks to keep a cap on your risk and costs.
If you think the market could rise but not by a lot, you could buy a call option and sell another call at a higher level (a bull call spread) or do the opposite - buy a put option and sell another at a lower level (bear put spread) - if you think the market will recede slightly. Then there’s the epically named iron condor, which could be useful if you think the market could stay rangebound. Often, investors prefer this strategy if they don’t expect the index to move a lot but want to trade with risk management in mind.
4. Selling index calls or puts: taking a view and generating a premium
Selling a call, if you expect the market to stay flat or drop, or selling a put, if you think it will stay above a certain level, can help generate income but carries higher risk if the market moves against you. If you are comfortable taking that risk, it may be for you.
Where do we go from here?
In the end, we can’t know for sure which way the market will turn. That doesn’t mean resting on our laurels and declaring victory against volatility - if anything it means using periods of relative calm to assess where we are and think about what could happen next, positive or negative. This is where index options could potentially show their value in helping hedge against the downside or taking a view on the upside with your own risk tolerance in mind.
Source: [1] Macro Volatility Digest, Cboe, 30 June 2025.
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.
We don't charge commission fees when you buy or sell stocks but contract fees apply to stock and index options. Other costs apply. See our fee schedule.
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.
