Date: 5/6/2022
Author: Chris Hood
Be sure to check out new episodes of my video podcast each week, where my ace pupil Brian Jones and I talk the ins and outs of options trading- and give you insights and strategy that you can immediately put to work for you in the markets.
Most investors and traders were glued to their computers or television on Wednesday.
Why?
Federal Reserve Chair Jerome Powell was set to report on the Fed’s interest rate policy moving forward.
Options traders certainly noticed some wild fluctuations in prices that day. Significant events like Fed talks create uncertainty, which creates volatility.
In options lingo, that’s called “vega expansion.”
Unlike stocks, options positions are extremely sensitive to volatility.
If you’ve been trading this week, I probably don’t have to tell you that. Huge P/L swings from day to day or even hour to hour are just the nature of the beast.
This is especially true when trading around ‘binary events’ such as Fed meetings, CPI reports, earnings, etc.
It’s impossible to know just how the market will react.
Trying to predict it is futile.
The only thing that truly matters is that you follow your plan and stick to your rules. Enter on solid set-ups and “win or lose,” exit when your signals dictate.
Most current retail traders have never dealt with high inflation and interest rates in a volatile bear market, but that’s the situation we’re in.
Add in something like the Fed meeting, and it gets even crazier.
Trading can be an emotional roller coaster even in the best times, but it can become overwhelming right now.
So take a deep breath and calm down.
Now let me give you some advice about trading around these binary events.
Was that the reversal we were looking for?
I’m still skeptical… It’s not often you see the market sell the rumor and buy the news.
First, know what significant market events are coming up for the tickers you’re playing.
I can’t tell you how many people lose money because they don’t bother to check when the company will report earnings.
Did you even know that the Fed was speaking on Wednesday?
If not, you must pay closer attention to the broader market picture. Big money certainly does, and they move the tape.
Second, minimize your risk as these events get closer.
The few days before a key report comes out is not the time to be throwing on dozens of new positions.
Just be patient.
Let the event happen, and the dust settle before you make your play. The market isn’t going anywhere. It will still be there in a day or two. However, your capital might not if you act too rashly.
Keep any new positions extremely small and consider taking some early profits to make sure your winners don’t turn into losers.
Even a 15% gain is better than an 85% loss.
And as far as trading earnings, unless you understand the intricacies of straddles, strangles, and butterflies, just avoid it.
Finally, avoid selling credit spreads that expire on or near these events.
Remember that bull put and bear call spreads make you money as they lose value. So you’ll repurchase them for less than the sale price or let them expire worthless.
These selling strategies rely on time decay, or theta.
Time is on your side, and for every day that ticks by without the stock breaching your short strike, you earn a little more.
However, volatility spikes drive up option prices – so much so that it can offset the theta effect.
It becomes tough to close what would otherwise be a winner.
Don’t let market events keep you from trading; just be aware of them. And if you don’t feel comfortable with the situation, sit on the sidelines.
Cheers,
Chris Hood
PS – Nice win for my colleagues at Rouge Investing Daily with a 23.05% gain on DLTR. Brilliant play here; taking small, consistent wins in shaky markets is the key. Greed will wipe you out. Learn more about these trades by clicking the link here.
