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Trader Talk: A look at Options and Volatility During a Bear Market

Site Administrator | October 6, 2011

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Special thanks to Silas Peters of DTI and Jim Kenney of OptionsProfessor.com for sharing some of their thoughts on the current volatility in the market.  Here is a recap of some of the great education that was covered:

How did you get started in trading?

Jim – Started trading gold, merged over to futures and stock.  Was able to hook up with someone who had been trading since the 60s, so he learned from a veteran.

Silas – Started out of college, interned at brokerage wire houses, two days after graduating college, moved to Chicago and worked at the CBOE and the overseas global trading desk.  Bought manuals, studied charts, continued learning, constantly and worked with brilliant analysts in the market.

 How long did it take you to find a trading method that worked for you?

Silas – constant learning process, still learning with the constantly changing market.  Benefitted from most by having a flexible view and trading several different markets.  Trading is a work in progress.  Biggest obstacle is himself, psychologically.  Sticking to the plan makes my methods work for me.

Jim – Don’t use just one trading method.  Helpful things – following along with long term moving averages.  If the market gets way away from the average, a possibility of a move back toward the average increases.  Transportation average is helpful with giving an idea on where the S&P might be going.

 How does your trading approach change in a bear market?

Jim – Got to look at covered calls, collar strategies.  Put writing strategies, because VIX is so high. These strategies are not right for everybody, and they are not limited risk strategies.

Silas – Seems to be more difficult in managing positions and managing the market as a whole in a bear market and in times of volatility.  You have to change your mindset from bullish to bearish.  Put spreads, credit calls.  Selling premium is like selling credit put spreads in bull markets, with the volatility, you can be tagged on each side quickly.  You need to have a risk management strategy in place.  Extreme moves caused by fear and panic happen quickly, so you have to be prepared to move quickly.

 Jim: What option strategy do you prefer during volatile markets like this one?

Like to look at the writing side of it.  The call writing side is not of particular interest because the premiums are much closer to the money on the calls and if there is a rally, those premiums will explode.  More danger.  The puts are interesting because way out of the money still has reasonable premium and they are far away from the current price.  Try to find out where possible support would be. Try to start creating some rational and set parameters around the trade.  Bottom line: when volatility and premium are high, there are many many parameters you have to consider.

 Silas: What are some of the steps you have taken to reduce risk during current volatility?

Employ credit writing strategies on SPX, RUT, etc.   Do a lot of mini-S&P options and bond options.  Cut back on some of the size that you’re used to getting.  Premiums are lucrative, but priced that way because the risk is higher.  Hedge your positions properly.  Make sure to place stops on contracts in futures markets.  Longer term trades, use debit spreads, because of unique opportunities to use this volatility to your advantage.  Weekly contracts on equity options and futures options provide nice strategies around monthly contracts.  (Use the weekly to hedge the monthly.)

 If you had to pick one trade idea (long or short), what would that be?

Jim – Right now on the commodities side, grains are looking to have a big sell-off.  Longer term moving averages are still rising.  The fundamentals of a shorter crop and demand returning, might make some discounted call premiums interesting to look at for next summer.  Gold has had a run because you get paid 0 on you savings account and they’re expanding money and credit at huge proportions.  With a rising moving average, gold may have another future to it.  Time is the key with gold, 9 or 10 month options.  Agriculture and gold – long term.  Energy – if oil prices get above 90, there might be a rally there.  On the stock front – will the market stabilize then have an improving environment or will it just deteriorate completely?

Silas - Gold is the hot topic of the market.  Longer term on gold and silver, gold in particular.  Gold futures, the February or April contracts, call spreads.  It is longer term and a little expensive, but the profit potential is good.  Japanese Yen - long term, the S&P long (December/January).  Gradually leverage in and use the time to your advantage.

To view a copy of the recording, please click the following link:  Learn about Trading in a Bear Market

Cheers,

The TradingPub

“Trade, Talk, Learn – Cheers to Success”

Follow us on Twitter

Risk Disclaimer: Past performance is not indicative of future results. Futures trading involves substantial financial risk. Please consult your personal financial advisor before using this information for your own trading purposes.

 

 

 Special thanks to Silas Peters of DTI and Jim Kenney of OptionsProfessor.com for sharing some of their thoughts on the current volatility in the market.  Here is a recap of some of the great education that was covered:

How did you get started in trading?

Jim – Started trading gold, merged over to futures and stock.  Was able to hook up with someone who had been trading since the 60s, so he learned from a veteran.

Silas – Started out of college, interned at brokerage wire houses, two days after graduating college, moved to Chicago and worked at the CBOE and the overseas global trading desk.  Bought manuals, studied charts, continued learning, constantly and worked with brilliant analysts in the market.

 How long did it take you to find a trading method that worked for you?

Silas – constant learning process, still learning with the constantly changing market.  Benefitted from most by having a flexible view and trading several different markets.  Trading is a work in progress.  Biggest obstacle is himself, psychologically.  Sticking to the plan makes my methods work for me.

Jim – Don’t use just one trading method.  Helpful things – following along with long term moving averages.  If the market gets way away from the average, a possibility of a move back toward the average increases.  Transportation average is helpful with giving an idea on where the S&P might be going.

 How does your trading approach change in a bear market?

Jim – Got to look at covered calls, collar strategies.  Put writing strategies, because VIX is so high. These strategies are not right for everybody, and they are not limited risk strategies.

Silas – Seems to be more difficult in managing positions and managing the market as a whole in a bear market and in times of volatility.  You have to change your mindset from bullish to bearish.  Put spreads, credit calls.  Selling premium is like selling credit put spreads in bull markets, with the volatility, you can be tagged on each side quickly.  You need to have a risk management strategy in place.  Extreme moves caused by fear and panic happen quickly, so you have to be prepared to move quickly.

 Jim: What option strategy do you prefer during volatile markets like this one?

Like to look at the writing side of it.  The call writing side is not of particular interest because the premiums are much closer to the money on the calls and if there is a rally, those premiums will explode.  More danger.  The puts are interesting because way out of the money still has reasonable premium and they are far away from the current price.  Try to find out where possible support would be. Try to start creating some rational and set parameters around the trade.  Bottom line: when volatility and premium are high, there are many many parameters you have to consider.

 Silas: What are some of the steps you have taken to reduce risk during current volatility?

Employ credit writing strategies on SPX, RUT, etc.   Do a lot of mini-S&P options and bond options.  Cut back on some of the size that you’re used to getting.  Premiums are lucrative, but priced that way because the risk is higher.  Hedge your positions properly.  Make sure to place stops on contracts in futures markets.  Longer term trades, use debit spreads, because of unique opportunities to use this volatility to your advantage.  Weekly contracts on equity options and futures options provide nice strategies around monthly contracts.  (Use the weekly to hedge the monthly.)

 If you had to pick one trade idea (long or short), what would that be?

Jim – Right now on the commodities side, grains are looking to have a big sell-off.  Longer term moving averages are still rising.  The fundamentals of a shorter crop and demand returning, might make some discounted call premiums interesting to look at for next summer.  Gold has had a run because you get paid 0 on you savings account and they’re expanding money and credit at huge proportions.  With a rising moving average, gold may have another future to it.  Time is the key with gold, 9 or 10 month options.  Agriculture and gold – long term.  Energy – if oil prices get above 90, there might be a rally there.  On the stock front – will the market stabilize then have an improving environment or will it just deteriorate completely?

Silas - Gold is the hot topic of the market.  Longer term on gold and silver, gold in particular.  Gold futures, the February or April contracts, call spreads.  It is longer term and a little expensive, but the profit potential is good.  Japanese Yen - long term, the S&P long (December/January).  Gradually leverage in and use the time to your advantage.

To view a copy of the recording, please click the following link:  Learn about Trading in a Bear Market

Cheers,

The TradingPub

“Trade, Talk, Learn – Cheers to Success”

Follow us on Twitter

Risk Disclaimer: Past performance is not indicative of future results. Futures trading involves substantial financial risk. Please consult your personal financial advisor before using this information for your own trading purposes.