Volatility over the past 24 hours has been utterly insane. And I absolutely love it. I thought I’d share a few thoughts bouncing around my head today and illustrate how I traded this.
First, henceforth and forever I will be using the 2016 election results and subsequent market reaction as the ultimate example that following the news with the intent of getting an edge in your trading is pure stupidity. As a lover of charts and CMT designation holder, I’ve always stressed it’s the reaction to the news, not the news itself that matters.
If you want to listen to the news to have your finger on the pulse of the economy, politics, earnings, or whatever, then fine. But don’t delude yourself into thinking you have a better idea what the stock market is going to do because of it.
Nonsense, I say.
The consensus was that a Trump win would spell doom for stocks. If today was doom, I’ll take ten more helpings.
Nobody knows nothin’.
Some traders love pontificating on the potential impact of news in all its variety. And as a mentor and instructor of option classes, I get my fair share of questions regarding what I think the stock market will do if X happens. Sometimes I entertain the query and spin a compelling narrative with my response. Because, why not? Other times I say what I believe deep in my bones is the best response for any technician to utter, “I don’t know, and I don’t care.”
Hey Tyler, what’s the stock market going to do if Hillary wins?
Hey Tyler, what’s the stock market going to do if Trump wins?
Hey Tyler, what’s the stock market going to do if the Fed raises rates?
I’m supremely comfortable in answering – I don’t know and I don’t care. I don’t know because, well, it’s impossible to know. And, more importantly, I don’t care because it has no bearing whatsoever on my success as a trader.
I have to focus on things I can control, not those I can’t. Don’t guess how the market’s going to respond to any news event. Your job is to prepare for all potential outcomes, and react accordingly. Here was my preparation for last night:
My active trading account had positions like the following:
November naked puts in EEM, IWM, SPY, SLV, XOP, PYPL,
November iron condor in NFLX, RUT
December iron condor in RUT
December naked puts in USO
November bear calls in GLD
The nine-day sell-off over the past two weeks necessitated selling some bear calls/naked calls in EEM, IWM, SPY, SLV, XOP, and USO to hedge. Naturally, my account got hit a bit during the swoon. However, I didn’t get stopped out of any of the bullish positions due to my management rules. When possible I took profits on the short calls/call spreads during the downturn.
Monday’s pop was a godsend allowing me to recoup all losses from the prior two weeks. I used the jump as an opportunity to lighten up into the election. Here’s how I reduced exposure that day.
Closed half the XOP naked puts at a profit.
Closed the NFLX Iron Condor at a profit.
Closed the GLD Bear call at a small loss.
On Tuesday my two biggest bullish positions were the naked put in IWM and SPY. I was short the Nov 114 put for IWM and the Nov 204 put for SPY. I rolled the IWM put down and out to the Dec 107 put to reduce the delta and open up the profit range just in case we fell post-election. For SPY, the 204 strikes was far enough OTM for me to keep it on. So, instead of rolling to Dec, I simply added a Dec bear call at 122/125 to hedge a bit.
With last night’s bloodbath I fully expected to be down money this morning due to my bullish leanings. Had that happened, I would have probably allowed assignment or rolled to next month at expiration for PYPL, SPY, EEM, and XOP.
Fortunately, the tides turned and all is well.