Make Friends With the Market

You have probably heard that the trend is your friend. While this can certainly be true, the market can be a good friend to have as well. This is a reminder that you need to remember what kind of market you are trading in. Over the past several months, the market has been extremely volatile. Take, for example, a recent Monday when the indexes and several big-name stocks jumped out of the gate much higher before settling down on the day. I have repeatedly said during my Group Coaching sessions that, to me, this a day trader’s paradise. What I mean is that since there have been such good movements intraday, there have been plenty of bullish and bearish potential setups. If you are a swing trader, as many option traders tend to be, then you have probably found this market to be a tad more difficult.

So, this brings me to my point today. Not only is it important to understand the different option strategies and the option greeks, you need to know or have a feeling about what the current trading environment is. This, of course, addresses the most important part of trading in my eyes: management.

As I like to say to 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. To me, non-bullish means not exactly bearish but you don’t expect the market or underlying to move much higher. Non-bearish would be just the opposite. The same thought process should apply to a volatile market as well. 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.

I have talked about establishing a decent positive or negative delta on your vertical debit spreads. The reasoning behind this is that if you get a nice move in your delta’s direction in a day or two, you will have a potentially decent profit even if expiration is several days or weeks away. Remove risk and put some money in your pocket.

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. What it really boils down to is smart and active management, and that is where money is made or lost more often than not.

John Kmiecik, Market Taker Mentoring

Trader Education