OPTIONS TRADING IN VOLATILE MARKET

Options trading in Volatile market can be frustrating, especially when you are a premium seller. Market can easily go one to another way very fast. There were several Forum readers asked me how I trade in a volatile market. Well, there are some advise from me:

1. Trade small
Do not trade more than you can afford. It is easy to say but sometimes it is very difficult to apply. It needs self discipline not too greedy when you look for opportunities. Beginner always see profits first and risks second. This pitfall can really make a hard hit to your account. There are 3 things can happen: you will act slower to cut your loss, your mind is not clear as usual, and your account can be easily wiped out.

2. Do “Guerilla” Battle with the Market
In volatile market, it is good not to chase a rally or a sell off to sell premium (as an Options Writer). This is due to big slippage on a wider bid and ask. You also do not know when the rallying/sell off will be ended. Therefore, people usually buy top and sell bottom, a contradiction of basic trading rules. I used to put my position in a such way with price that I want. I let the market get it, instead of chasing it.

3. To be a Contrarian
To be a contrarian in a volatile market sometimes is very difficult. It needs trading experience and expertise on chart reading. However, this is where that professional traders usually do. When market sell off and go to low capitulation, people are buying insurance (Buy Put Options). Therefore, volatility is increasing and options premium pushed up. If I convince a strong support line and it is on a very low capitulation, I will sell Naked Put or Put Spread. If I like the stock, selling a naked put is a synthetic of Covered Call Writing. However, if I want a define risk with positive time decay, I will write Put Spread instead.

4. Loose a bit of your Stop Loss
Well, it is also a contrarian belief that you must loose your stop loss during volatile market. Stock trader will tighthen their stop loss, but I as options trader will loose my stop loss. This is because when market has big move, sometimes your short position will be threaten temporarily and market will come back again. Since I trade small with defined risks, I can play with this strategy properly psychological burden.

5. Expect more Return to your Position
When you trade small on volatile market, you can expect more return on your position. Sometimes I can double my return with probability of win almost 70%. Well, it is still a good bet. By doing so, your position can provide you with a yield as the same as when you trade big when market is not volatile.

Well, I hope this can provide you some information how I trade Options on a Volatile market.

Happy Trading…..