[Options] MARKETS IN TURMOIL

Sean McLaughlin
January 24, 2022

There you go.

I wrote that headline to save you the trouble of turning on your TV or following your favorite fear mongerer online. You're welcome.

Unless you've been lost in the wilderness for the last two weeks (not a bad place to have been, btw), then you no doubt know the bulls are currently in trouble.

The fake-out breakout in the Russell 2000 $IWM has turned into a full-blown route, the S&P 500 is testing levels last seen at the end of September and early October, and $VIX has printed the highest levels of the year. There's not a lot to be optimistic about right now -- especially if you're holding a bunch of long positions that are at or near stop-out levels like I am.

I got stopped out of a bunch of positions last week, two today (a long call spread in $STX and a short strangle in $XLK), and a couple more might get exited tomorrow if things don't stabilize here.

Into this maelstrom, we've been dialing back putting on new positions. During last week's holiday-shortened trading week, we only put one new position on -- and that may have been one too many ;)

At times like these, often the best trade is no trade at all. At least when it comes to putting on new risk.

Of course, for positions that are currently on the books, we need to remain vigilant and stick to the plan. If/when stops are triggered, we must take action according to our exit plans.

My best practice -- one that serves me especially well during violent swings in the markets -- is to always wait for the CLOSING PRICE for my signal to exit. If a stock closes below my stop loss level and it remains there at tomorrow's open -- I'll exit the trade tomorrow. I don't take immediate action intraday whenever a stop loss level is first triggered. Too many times, especially in whipsawing markets like this, we'll get false signals. We'll get stop runs with violent intraday reversals.

I don't want to get stopped out on noise.

The closing price is the most important price of the day. That's the price that gets printed in the morning paper. That's the price that people have all night to think about.

Of course, an important part of being able to patiently wait for the closing price and the following day's open to exit my position is to either trade with defined risk positions right from the start and/or properly sizing our positions so that no loss on any individual trade will result in nothing more than a blip to our trading account.

I harp on this all the time, but it's because of times like these. We need to survive these moments. They will happen again and again. It's part of the game. It's a feature, not a bug.

How we set ourselves up to survive these moments dictates how we'll prosper when the stars align in our favor.

If you have any questions, please send them here.

ASO subscribers who missed last week’s live Jam Session, you can catch it here.

~ @chicagosean

P.S. If you'd like to leverage Best-in-Class technical analysis into smarter directional options trades, try out All Star Options Risk Free! Or give us a call to learn more: 323-421-7991.

 

Filed Under