Trading Titans Podcast: Volmagedom Lessons from the Crash
When trading, several factors come into play that otherwise may not occur with a longer-term investment. That’s especially true when trading with options. A trader can get the general direction of a trend right. But if their timing is off, the trade could still lose.
Likewise, market volatility plays a factor in option pricing. The higher the market volatility is, the more likely stocks are to swing higher or lower on a daily basis.
When that happens, option prices can likewise trade higher. And that can impact the profitability of options trades as well.
Early August saw market volatility spike to its third-highest level, just below the pandemic and the housing market crash. The short-term reason? The potential unwind of the carry-trade based on the Japanese yen.
While that proved short-lived, investors who were unprepared for that volatility spike may have given up months of profits in a matter of a few hours.
Traders who are sellers of option premium were able to profit from this spike higher. That’s because higher volatility meant higher option prices. And with the markets calming down nearly as quickly as they panicked, the spike higher in volatility didn’t last.
For traders, the real key is having a consistent strategy that’s robust to handle unexpected events. And to have a plan in place to adjust trades when it’s apparent that market conditions have fundamentally changed.