What about Janet’s comments on the Market?

The comments Janet made on the market should have been consistent with and not disturbing to anyone following the market. The SPX Monday hit a high of $2120, near all time highs,  and proceeded Tuesday and Wednesday to drop about 40 points to the $2180 level. Today the SPX is about about 10 points higher at the current $2090 level. If I asked any of you Monday if you had thought about lightening up some of your long positions or taking some prophets on some of your stocks, most of you would have said yes. Did Janet really say anything different than you were thinking? Of course not. Financial Journalists always have a precise reason the market has increased or decreased for a particular day, most of it baloney. The market probably went down this week because people were taking a few profits because we were at pretty high levels in the market, period!

Dealing with Market Volatility Spikes

One of the most daunting tasks for the option trader is dealing with a spike in market volatility. The situation is particularly difficult because of option’s leverage and risk. It is further compounded if you are also short volatility and dealing with large price movements. Often panic can set in for the new trader, as the price and volatility keep moving against a position. There are things you can do both in the short-term and longer-term to help protect your position.

First, “stop the bleeding”. By that I mean buy long options or long option verticals to immediately stem the tide that is going against you. If you have a spread type trade on and the price and volatility are running hard one way against you, pick up a long option immediately to at least slow down the damage while you further analyze a more appropriate adjustment to your position. Long options and simple verticals often have less slippage and you can get a quick execution of your trade even in a market that is volatile. At this point you have at least reduced the risk on the bad side of your trade.

Once you have slowed down the damage, we can look at further repairing the trade. Depending on the strategy that you are utilizing this may involve rolling out short verticals to further out strikes, adding to the position with more verticals or spreads or in certain cases exiting to trade altogether. Sometimes exiting the trade and then perhaps starting it again another day when the market has calmed down is also a good plan. Typically look to do two, maybe three adjustments to any option position that is working against you and after that consider closing the position. It is important to have this planned before hand so that you have your possible adjustments in mind and also an exit plan at a max loss point that you previously chosen. Planning ahead is key otherwise fear and emotion can cloud good judgment.

Volatility swings in the market are part of life for the trader. Learn to master these and it will increase the success of your option trading business.

Example of Stock Iron Condor in AAPL

Example of a stock Iron Condor would be AAPL. I am first using the criteria for a stock Iron Condor from the previous post today and then giving a trade example.

Criteria #1: It’s a stock I would buy 100 shares in my retirement account.

Criteria #2:  Very Liquid stock, AAPL trades around 200,000 option contracts daily, dwarfing most other stocks in Options Volume. Also, AAPL is high enough price, currently at $124.

Criteria #3: AAPL implied Volatility is around 25 for at-the-money calls, I like stock Iron Condors around 25 level.

Criteria #4: If I was putting more Iron Condors on in stocks, I would add stocks from different industries than AAPL.

Iron Condor Trade in AAPL:   Stock around $124. Looking at June 5 expiration, around 30 days from now. Buy 1  138 call and sell 1   133 call.  In the puts, buy 1   110 and sell 1  115 strike. Total Credit for 1 Contract is $110. Total margin or risk for 1 contract Iron Condor is $390.