It’s Part of the Game
• SOMETIMES WHEN STOCKS are moving the same way day after day and volatility is just hanging out at below-average levels, your trading may feel a bit—shall we say—predictable.
But then one day things stop lining up. Systems fail without much warning. Maybe it’s a political event, a virus outbreak, or a natural disaster. Stuff like this changes moods, regardless of the fundamentals, and it reminds you that volatility happens. Sharp, emotional reactions increase volatility (vol), which increases risk. As traders, we should be ready to embrace volatility and higher-risk environments. It doesn’t mean you’re immune to risk. But you should be aware of how risk can impact your positions and overall portfolio.
When the market moves quickly and sharply, it’s natural to get hung up trying to figure out which positions are losing the most. But there’s more to risk than just looking at profit and loss. As an option trader, you’re used to vol moving around a lot. You can see it in the greeks—delta, gamma, theta, vega (changes in direction, time, and volatility). Those values start changing from the time you place a trade right up until your options expire. The magnitude of the change is related to the risk of your options.
But instead of looking at each position independently, maybe take a step back and look at your portfolio from the perspective of overall risk, not just volatility. Our feature article, “Well, That Wasn’t Supposed to Happen!” on page 16 highlights changing greeks and shows you how to do an apples-to-apples comparison of all your open positions. This could help you decide if you want to reduce risks or if it’s okay to hold on a little longer.
But maybe it’s not just about vol, time, and direction. It can be about your strategies too. If you’ve been trading for a while, you know that your strategies work until they don’t. “Time for a Strategy Change? (You’ll Know It When You See It)” on page 28 points out a few reasons for this and some ideas for how to bob and weave when it happens. Fortunately, there are some measures you could take—dial back, tweak things a little, or maybe even abandon a strategy and start over. There’s no right or wrong way to tackle the markets. But it’s nice to be prepared for surprises.
Happy trading,
Kevin Lund
Editor-in-Chief, thinkMoney