Have you noticed how volatile the market is and how it seems to gap almost every session at the open? Of course you have—unless you have been stuck under a rock. This post is a reminder that option management needs to be front and center at all times, and many times risk need to be taken off the table early.
Difficult Market
As I have said over the past couple of months, this market has been difficult for swing traders (who focus on 2- to 5-day trades) to make money because of volatility. Market swings have been huge and most times very unpredictable on a day-to-day basis because of the news. I have said in MTM’s Group Coaching class that it might be prudent to take profits and cut losses quicker than normal under these circumstances. This includes moving up hard and mental stops in a planned and structured fashion and taking smaller profits.
Smaller Profit Targets
In markets like this, option traders need to consider taking smaller profits and limiting themselves on the loss side too. For example, if you normally look to take a 50% profit, maybe consider taking a 20% or 25% profit instead and moving your stop losses up at least to breakeven on the remaining positions. The market has been gapping so much and reversing intraday that limiting your gains actually removes risk sooner. It’s true you can no longer profit on a closed position, but you can’t take a loss on it either. Remember, your main goal as a trader is to preserve your capital and be a risk manager.
Limit Risk
The same thing goes for limiting your losses. Consider smaller contract size for your positions and risking a smaller percentage on each trade. So instead of risking 50%, for example, consider 25% instead. You may also want to think about putting on half your normal contract size and maybe risking a bit more to give the trade a little wiggle room in this volatile market. There is nothing more deflating than being stopped out and watching the position profit that same day or next because of tight stops. Of course, how you want to do this is completely up to you. Just consider this a general guideline. But I can tell you that it has served me well before in markets like this.
Final Thoughts
As I often say in group coaching class and in my one-on-one coaching sessions, the market is never normal—because what is normal? But there obviously are times, like now, when it is more volatile, so be sure to strap that risk manager cap just a little tighter when you wake up each day.
John Kmiecik
Senior Options Instructor
Market Taker Mentoring
