This post is just a friendly reminder to remember what kind of market you are trading in. Over the past several weeks, the market has been extremely volatile. Not only have the closes been sporadic, but the intraday sessions have also been like a roller coaster. I have repeatedly said during MTM’s daily group coaching sessions that this is a tough environment to trade options in.
What Should You Do?
It is vitally important to understand the different option strategies and the option greeks, but you also have to know what the current trading environment is. This addresses the most important part of trading, in my view, which is management.
I often tell traders to try to be on the side of the market. Market sentiment is important. So, figure out if you are bullish or bearish on the market or somewhere in between. The same thought process has to be applied in a volatile market. If you are accustomed to taking profits over a certain length of time or a certain percentage, consider altering your criteria, especially when market conditions change. It is important to take risk off the table even for a loss. Consider lowering your profit potential percentage or time in the trade.
TSLA Example
Let’s consider an example we discussed recently in group coaching regarding Tesla Inc. (TSLA). The stock had surged higher and was trading just over $300, and it was still moving higher. The overall market was getting extended to the upside, and I said it was most likely due for a pull back soon. I urged traders to take risk off the table and move their stops way up. The stock promptly sold off after making a new recent high.
Final Thoughts
Understanding the market environment is just one of many things an option trader needs to know when he or she is active in the market. The preference of being on the side of the market does not always work, but most of the time it does. What it really comes down to is smart and active management. To me, that is where money is made or lost.
