The author argues that in the current environment, adopting a tactical, short-term approach to trading and portfolio management might be more important than ever.

It is an understatement to say that markets are volatile right now, given the issues around tariffs, and uncertainties around policy. What sort of strategies should investors consider? To try to answer this question is Michael Martin, vice president of market strategy, TradingBlock, a customizable trading platform. 

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Americans are bracing for more inflation. As the macro environment and market conditions appear increasingly unpredictable this year, a more tactical, short-term portfolio and trade management approach could be the right move for many traders and investors.
 
For market players anticipating a cakewalk, our present-day reality may be hard to swallow. Long-term investors generally prefer a stable environment, but 2025 and even 2026 may not provide that luxury, and many are preparing for the unexpected. According to Morgan Stanley Wealth Management’s latest quarterly retail investor pulse survey, more investors are concerned about market volatility in the current quarter than in the previous quarter.

Should turbulence come over the horizon, a sector-by-sector approach – analyzing which industries and stocks are most exposed to volatility – could be beneficial. Rather than selling positions outright due to uncertainty and potential tax implications, decision-makers might consider using an options overlay to hedge against downside risks or collect income in industries affected by tariffs or trade policies. This strategy allows them to maintain core holdings or concentrated positions while adapting to market conditions and the latest policy moves.
 
The role of the Fed: Rate scenarios and trading strategies
One of the most significant uncertainties in the market is the Federal Reserve’s stance on interest rates. While there is wide speculation about whether the Fed will cut rates, hold steady, or even raise them, the key takeaway for traders is how to position themselves under each scenario. If the Fed cuts rates, liquidity increases, and equities typically rally. Traders could take advantage of a high-risk strategy, such as selling put options to generate income, buying bull call spreads with defined risk, or buying naked calls for strong bullish sentiment.
 
Then again, the Fed could hold steady, and stock prices may stagnate. In this case, building an options overlay on top of an existing position can help generate alpha. The covered call strategy is a way for equity holders to collect a steady stream of income in a stagnant market. Bear in mind, however, that the stock may get called away if the price rallies above the short call strike at expiration. The short iron condor is another strategy for range-bound markets, along with short straddles and strangles, but it’s worth mentioning that the latter carries significant risk.

If inflation remains persistent and the Fed raises rates, equities could decline. To hedge against this, traders might consider purchasing put options against long stock to protect against downside losses. Other bearish strategies include long naked puts, bear put spreads, and bear call spreads.
 
A useful resource for gauging rate expectations is the CME FedWatch Tool, which provides market-implied probabilities for future rate decisions.
 
Sector-specific considerations
Tariffs are another major factor to watch. New tariffs against Canada, China, and Mexico were announced this year. In 2025, certain sectors – such as manufacturing, agriculture, and automotive – could experience increased costs, potentially affecting stock prices. Options traders can use strategies such as protective puts or spreads to mitigate risks associated with these developments.
 
Market valuations spell higher volatility
Warren Buffett popularized the “Buffett Indicator” to measure the ratio of stock market valuation to US GDP. The Indicator is at an all-time high at more than two to one. Other metrics that measure historical valuations, such as the Shiller P/E Ratio, indicate that markets are near all-time highs.

The fragility of these valuations is coming to the fore, especially against the backdrop of bombshell announcements, such as the news about DeepSeek, which unleashed sudden volatility for technology stocks. Volatility is likely to be higher in the coming years because events like the DeepSeek selloff could happen again, though predicting the exact nature or timing is impossible.

Sector-specific approach needed for AI stocks
When it comes to tech stocks and AI stocks, a sector-specific focus could come in handy as traders and investors pay close attention to the headlines. The most significant risk this year might be what we don’t know. The January selloff was Newton’s Third Law of Motion in action – if every action has an equal and opposite reaction, DeepSeek demonstrated to Magnificent Seven executives spending extravagantly on AI that this technology might be cheaper to develop than initially thought.

That may be bad news for chip manufacturers in the short term. In the long run, however, companies like Nvidia will likely continue advancing AI capabilities, shifting their focus to even more sophisticated hardware and software solutions. And with so many economic, geopolitical, and technological variables in play, market shocks could come from unexpected places.
 
Another key element to gauge emerging trends is the VIX, which is the ticker symbol of the Cboe’s Volatility Index. A rising VIX often signals uncertainty and increased demand for protective hedges against long positions, while a low VIX suggests complacency. Traders can leverage VIX options as a strategic tool to navigate market risks more effectively.

As the latest developments dominate the headlines, firms need to consider whether they are chasing alpha – seeking outsized returns – or market exposure, beta. Given the current environment, adopting a tactical, short-term approach to trading and portfolio management might be more important than ever. Whether the market is shaped by Fed policy, sector-specific shifts, or geopolitical uncertainty, using options strategically often helps decision-makers generate returns, manage risk, and navigate volatility effectively. Educating traders on their options is key to helping them make informed decisions.