The stock market’s been a bit of a roller coaster the past three weeks.
Between omicron variant fears, low trading volumes and the usual dysfunction in Washington, the headlines have been triggering algorithmic-based selloffs only for markets to rally right back.
That kind of volatility can be a double-edged sword. We need volatility to get the kind of moves that create the oversized returns we’ve grown accustomed to in my strategies, like the Daily Profits War Room.
Increased volatility also ups the chances of a big move to the downside.
The fear of downside often has traders running for the cover of common risk management techniques like protective stop losses.
But in an age of sophisticated computer trading, those stop loss orders might as well be a target on the back of a trade that the big institutions are more than happy to go hunting for.
That’s why pro-style options risk management doesn’t rely on stop-loss orders.
Pro-style Options Risk Management for Volatile Markets
Earlier this past week in the War Room, our scanners picked up a big buyer of Oracle Corp. (NYSE: ORCL) Dec. 17 $94 strike calls ahead of Thursday’s earnings event.
That trader paid around $2.00 per contract, dropping nearly $1 million in premium on the software giant.
Over the next seven sessions shares fell hard, dropping from over $92 bucks all the way down near the $88 mark — about a 4.5% pullback.
Now let’s take a look at what happened to those option premiums…
Source: Barchart
Even if the trader would have bought those calls on the Dec. 1 dead low and used an extremely loose 50% stop loss, that stop loss order would have triggered on Wednesday’s pullback…
So instead of a potential 5x’ing on the trade trade, our big swinger would have watched that $1 million become $500,000 in a matter of minutes.
But we know that didn’t happen because the open interest largely stayed the same through Friday’s trading.
Right now, that trader — and anyone who joined in and stayed there — is popping champagne and wondering what scotch pairs best with that dry aged filet for tonight’s dinner.
How’d they do it? Professional traders like our mystery friend here use position sizing to minimize their risk and keep their accounts in the black. They never risk more than they can safely afford to lose, and neither should anyone.
That way, we don’t sweat when we see a pullback and it gives us a better chance to reel in oversized gains.
Pro-style options risk management isn’t just for the players at big banks and hedge funds, these are fundamental trading tools that can benefit traders of all portfolio sizes.
Check out my short video and let’s talk about pro-style options risk management and why stop loss orders suck.
Don’t forget you can follow me @LanceIppolito on Twitter, Instagram and our YouTube channel for more trading insights and tips. And as always, you can find me right here talking stocks and options trading — and printing money — on WealthPress.com!
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