Market Outlook: The market closed Friday at 1880, down 200 points or 8-9% in about 2 ½ weeks. The first 2 weeks of 2016 has seen quite a bit of volatility.
In SPX, we have had 5 of last 10 trading days with moves of 1 ½ % or more, unprecedented!
Translated into net price changes at the end of the day, that’s 5 days out of last 10 where SPX has net moved 31 to 48 points in one day!
Total Daily Move
The moves are actually bigger if you look at the total daily move taking into account the high and low of the day. Try to keep weekly trades delta neutral in that environment!
We basically have had 2 corrections in the last 6 months, first time since Al Capone came to Chicago!
Where will the market go next week?
Should I stay in my bunker till the market quiets? I don’t think so. If you read enough business articles, this is where names are made.
Where fear is rampant, like now, rampant predictions come out from the would be and even the current Gurus .”
The market will drop 10% more” or “This is the best buying opportunity of the year”. You usually will go with whatever prediction matches your opinion.
That’s my lesson in psychology!
Figure Out Risk Management
The way traders should look at the recent move is to put down the blogs and newspapers and figure out what trades and what risk management you can live with in this environment.
In other words, what tweaks do you need to make if any to your current trades to make them more winterized for this type of market. This environment is where you really grow as a trader.
The last 3-4 years have been mostly up with lower Volatilities and people get complacent and confident that they can trade well in any environment.
Many Californians can drive convertibles with bald tires all year and have no problems. If they come to Chicago in a February Blizzard and don’t make tweaks like buying snow tires, they will end up in a ditch somewhere dreaming of their surfboard!
I think SPX will continue 1- 2% plus moves next week then the percent moves might slow down a bit.
With IV levels high, Butterflies have half the dollar risk for a comparable trade than when IV’s were cheap in June, pretty good deal.
As far as Iron Condors, you are probably getting about twice the distance with your short options and a bigger credit also than you did with your Iron Condors in June.
I think if you keep your trade duration out 40-60 days, have good adjustment points or exit points, and utilize long options at adjustment points, you should avoid drowning.
Don’t write off long options as adjustments, your bringing in a lot more credit on your short options! The big thing I would be concerned with in this environment is Execution.
We can’t use the excuse of the market moving to fast as to why we lost 2 times our maximum loss.
What Do We Do?
If we need to adjust or get out of a spread and are having no success even after caving in .20-.25 cents in SPX or RUT, would just grab a single option like a call or put and cut your position deltas maybe 2/3 and put the band aid on till we get a day more peaceful that you can do spreads.
Cut your size a bit if you need to, but this is a good time to grow as a trader.
If you are a newer trader or not comfortable with execution in a volatile market, then I would wait on the sidelines. We are officially trading now at Pac Man level 4, strap on the seat belt!
Have a great Weekend, enjoy and recoup with the Trading day holiday on Monday, see you Tuesday! If I can be a help to you in your trading during this volatile environment , just e-mail me.
Dan Sheridan firstname.lastname@example.org