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.
I nearly never consider a trader competent unless he’s been at it for a couple of years.
Could you hone your skills to consistent profitability sooner?
It’s certainly possible.
However, I know from experience this isn’t what usually happens.
One of the significant issues you’ll face as you enter the market arena is a lack of perspective. Every bull run seems as if it will go on forever, and minor pullbacks foretell the end of days.
The longer you trade, the more you’ll realize that the market is both unpredictable and cyclical.
Though the broad market, major indexes, and various equities will never repeat their movements precisely, it’s folly to ignore seasonal patterns.
Currently, we are approaching the ides of September.
It’s a month known for chop and price volatility. The rolling of SPX contracts, institutional rebalancing, and quad witching on the 17th makes for a rocky ride.
And the market continues to defy gravity and make ever more all-time highs.
A correction seems to be in the cards, but who can tell when it will happen. I certainly can’t – I gave up my crystal ball predictions years ago.
No more fortune telling for me.
So in a market situation like this, we simply have to trade the charts and take opportunities as they present themselves.
What’s most important is managing your risk.
Given the long upward run of SPX and the time of the year, two things become increasingly important.
First, there is more risk to the downside than potential reward to the upside in most underlying stocks. Just keep in mind the relationship of equities to the market.
The S&P 500 is similar to a harbor.
Just as rising tides tend to raise all ships, they could very well touch the bottom when the water level drops.
I’m definitely not suggesting you short this market.
We’re still in an uptrend based on the weekly chart, so quick bounces or a slow upward grind mean you could land up losing your shirt playing the bear.
Second, the volatility of the market this time of year tends to cause gap ups and downs.
These quick, overnight movements can wreak havoc on bullish trades, especially those with only a week or so to expiration.
A sharp drop can skewer your bull put spreads and turn any short-duration long calls or bull call spreads into losers.
So how do you trade in this type of market?
The key is to follow your plan and your rules. As you develop your skills as a trader, you’ll have different strategies for different market conditions.
Here are two fundamental principles to consider as you refine your strategy.
The goal of trading is to make money. Unfortunately, volatile markets can turn winners into losers overnight, so take your profits sooner.
Some profit is better than none, and when the market is giving you mixed signals, it’s better to take the money and run.
This is especially true on Fridays – you never know what next week might hold.
You only stand to lose what you risk, so keep your position sizes smaller.
This is not the time to go all-in on any trade.
Keeping a 1-3% position size is advisable in any market. However, in choppy markets with elevated downside risk, it’s even more critical.
Consider scaling back to the 0.5-1% range.
Remember, your goal in September and October is to minimize risk. So trade small and take your profits off the table when you can.
When the market does eventually drop, you can swoop in and get your options at rock-bottom prices to take advantage of the next leg up.
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