Know Your Option Trading Environment

Sometimes I know I must sound like a broken record. In my group coaching class, I have repeatedly said this is a very volatile environment and option swing traders (2 to 5 days in a trade) may find this too much like gambling. For day traders, this is not a problem watching markets swing throughout the session and on a day-to-day basis. To me, it feels like you need a little too much luck in this environment.

So, this brings me to the gist of this article. Not only is it important to understand the different option strategies and the option greeks, you also have to know or have a feeling what the trading environment is that you are currently in. This addresses the most important part of trading in my eyes: management.

Managing Your Option Trades

As I like to tell traders, you would rather be on the side of the market, right? So, figure out if you are bullish or bearish on the market or somewhere in between. Now that being said, not every underlying moves in the direction of the market and vice versa. But still, odds are better if you are. The same thought process should apply to a volatile market for management too. If you are accustomed to taking profits over a certain length of time or a certain percentage, consider altering that especially when market conditions change. For example, consider lowering your profit potential percentage or time in the trade.

Long Call Example

Here is a recent example I did in class on Nio Inc. (NIO). The stock was trading just over $40 and was breaking higher. The overall market appeared neutral to slightly bullish. We modeled out a December 60 call for 2.05 and I told the class to consider smaller contract size. Normally I would have put a profit target (sell limit) out there for about a 25% to 35% gain on the investment. But in that trading environment, I put a sell limit out there for 2.40 to exit some contracts. If it was filled, I would put another sell limit out there slightly above 2.40 for the rest of the contracts. The next couple of days the stock surged higher and hit my targets or did even better before falling back to down to just above $40 as seen on the hourly chart below.

Understanding More Than Just Option Strategies

Understanding the market environment is just one of many things an option trader needs to do when he or she is active in the market. Understanding the option greeks and the various strategies is a must indeed, but to me it is not the absolute most important aspect of potentially becoming a successful option trader. What it really boils down to is smart and active management. That is where money is made or lost more often than not. If you don’t believe me, just look at the percentage of traders and investors who are consistently successful. Unfortunately, it is not very high.

John Kmiecik, Market Taker Mentoring

Trader Education