After looking at the title of this post, you are probably thinking, “well, of course they can produce volatile days.” While we often know things like this as traders, our emotions can take over and common knowledge sometimes go out the window. This is just a reminder to keep the emotional trader inside you in check.
Example in SPY
Over the past couple of months, there have been some very volatile and erratic trading days even when there was no volatile event. But when there is one that is known, like a FOMC meeting (one this week) or the latest jobs number, traders need to be disciplined.
In the 15-minute chart below of the S&P 500 ETF (SPY), you can see buyers and sellers had quite the session. This happened around mid-October. The ETF gapped much lower and then proceeded to run higher resting at some potential resistance provided by the 200-day moving average at the end of day. Before the open, the latest Consumer Price Index (CPI) number was released.
Time for Some Day Trading
I remember that day specifically because I told the traders in my group coaching class that it seemed like a good time to do some day trading. Generally, as option traders, you do not look to do the bulk of your trading being in and out of positions in the same session. Trading stocks, ETFs or futures is probably more suitable. There is also nothing wrong with sitting on your hands and not trading when you do not feel you have an edge either for the day or going forward. As I tell my students, some of the best trades you’ll ever make are the ones you do not. In addition, it is better to be out of the market wishing you were in than in the market wishing you were out.
Take Risk Off the Table
Before that volatile day, we modeled out several call credit (bear call) spreads in class. I stressed the importance of taking risk off the table and putting some money in your pocket as most stocks gapped lower with the market at the open. In addition, I also emphasized the importance of moving up stop losses to levels better than breakeven just in case the market and stocks rallied. The market did that and then some as many bearish positions were exited with its major climb that day. But guess what? With stop losses in place, all was not lost.
There are several reminders to think about in this post. First, be careful about putting on and managing current positions over a known volatility event. Second, the market can change in a big way very quickly. And third, management is still the most important part to grasp as a trader.
Senior Options Instructor
Market Taker Mentoring