Volatility in the market has become the norm…this first week of March 2024 in particular as Federal Reserve Chair Jerome Powell testifies in front of Congress for two days. There have been some sizable market swings. Should you manage your option trades differently in a market like this? You have to decide that for yourself, but it might be a good idea to explore your options (no pun intended).

Adapting to a Crazy Market

The market has been having some big swings even though the major indexes are setting new highs. Intraday swings have been huge at times, making it a little more difficult to extract money from the market for several days in a row using the same position. It might be prudent to take profits and cut losses quicker than normal under these circumstances. This also includes moving hard and mental stops up quicker than your management plan calls for.

Be Content with Smaller Profits

Dialing it back in this crazy market means being content with smaller profits and trying to limit yourself on the loss side too. For example, if you normally aim for a 50% profit, maybe consider taking a 25% or 30% profit and moving your stops up at least to breakeven on the remaining position. Of course, mental or hard stops are not guaranteed. The market has been gapping so much and reversing intraday that limiting your gains actually removes risk sooner too. As I like to say, you cannot profit any more on a closed position, but you cannot give back or lose any more either. Remember, your main goal as a trader is to preserve your capital by being a smart risk manager.

Take Off Risk

The same thing goes for limiting your losses. Consider taking “nibble size” contracts (smaller than what you consider normal) and risking a slighter higher percentage on each trade or just the opposite. Instead of risking 50%, for example, consider 25%. What has worked for me more often is just doing smaller contract sizes. To me, there is nothing more deflating than being stopped out of a position and then watching the position profit the same or next day because of tight stops. Of course, how you want to do this is completely up to you. Just consider this a general guideline and some helpful suggestions to consider.

Final Thoughts

As I often say, especially in MTM’s Group Coaching class, the market is never “normal” and never will be. But there are times when it is more volatile…like right now. Be the risk manager you need to be.

John Kmiecik, Market Taker Mentoring