Are you ready for a roller coaster of emotions? If you haven’t noticed already the markets are flying around and this is very likely to continue. This is probably not a big shock to most. I am certain there are those folks that are quite new to trading and maybe haven’t seen this phenomenon before but I hope you are prepared for the next four weeks of the market.
Of course, I am referring to the upcoming presidential election in the United States. There is any number of events that can cause an uptick in the volatility of the overall market but few have this kind of effect and this kind of staying power that a presidential election. This year’s election seems even more polarizing which I think will add to the usual prolonged spike in volatility. From now until November 3rd we should see a sustained rise in the price volatility and that only leaves one question…how should we approach our trading?
The one question I think everyone needs to ask themselves at this point in the market cycle is am I ready for the change in the markets? Have I added the increase in volatilty to my expectations? Have I prepared myself for the swings that are most likely to come? The most important question is probably, is my trading plan taking into consideration the uptick in volatilty? If the answer to any of these questions is no then I would suggest a very thorough review of your portfolio and trading plan is in order.
Speaking with many newer traders, or rookies as the case may be, they tend to spend the time learning strategies and find themselves concentrating alot on DELTA and THETA which is ok but at some point in the trading journey, VEGA has to be built into the plan as well. If you have been trading for any length of time or had some education before entering the markets then you may be familiar with the concept of VEGA as it relates to option pricing. For example, if you have higher implied volatilty on an equity then the cost and benefit of options will naturally be higher. The converse is also true, a smaller implied volatilty would see lower cost for options as well as lower premiums for selling options. This is a very big consideration when selecting the proper strategy for any given option trade. However, this is only one concern that needs to be baked into your trading plan. There is another concern that needs to be addressed in your trading plan and it is often overlooked by many traders. That other concern is time and timing.
When we get an increase of overall volatility we start to see wider price ranges that are outside the typical for a particular stock. Take a look at the chart below and you will see that in February when the market took a nose dive the candle widths exploded on even the slowest moving, small range type stocks. The chart in question is BAC, Bank of America. This is notoriously a slow mover with pretty small range candles. If you look at the left-hand side of the chart you will see what I mean. Once February came that all changed as volatility exploded and has remained quite high in comparison to the last few years.
As I mentioned above, a good trade plan is going to take into consideration this expanded range but there is one more thing that is just as important if not more so and that is the ability of a trade to reach it’s target or its stop loss much quicker than expected.
The key to trading in higher volatilty markets is the ability to take profits quicker and making a solid plan for getting in and out of trades as what ever is epxected to happen will most likely happen faster than imagined.
So, in closing, make sure you account for the change in volatilty that something like an election can bring and be sure to bring your trade plans up to date to include the new variables. If you do this effectively you will be better prepared to take advantage of the increased volatilty instead of becoming a victtim of it.
Trade Well and Be Sure to Exercise Your Right to Vote!
Coach “Old Money” Holmes
Trading is like life, it takes dedication, perseverance, and a whole lotta help to succeed.