Will Santa deliver up stock market gains into the early part of next year?
Well, it appears so. With the release of today’s U.S. employment data, not only is the job market levitating upwardly firm, but the market participants have wholly discounted a potential rise in interest rates by the Federal Reserve.
If Santa was able to squeeze his rump down. your chimney this year, what would be a gift you could use all next year? One of the best things I can think of would be the gift of higher implied volatility in the major market stock indexes. But will we see it?
I believe so. We must get ourselves prepared for that inevitability. Below is a chart of RVX. This is a good example that holds true for the other indices we trade.
How do we prepare ourselves for a higher VOL environment? Here is a short list of what I am going to be doing. Remember along with higher IV in the options, there is also a corresponding gain in Statistical Volatility (SV) which means there will be larger swings in the daily and weekly price movement of the underlying instrument. Large up/down moves that overlap each other is ideal, however I’m going to be guarded for the stuff that can hurt us. Namely large protracted moves with in one direction with high momentum.
- I want to be neutral to long IV (at a minimum). Neutral IV means that the Vega of a position should be about even with Theta on a daily basis (1 to 1 ratio). Long Vega means that ratio would be more like 1 to 2. Really long IV is where the Vega of your position is 3-4 times the daily Theta.
- I want to consider to start using longer term insurance of my trades in case of any unexpected large moves. Insurance could be buying put debit spreads out-the-money (OTM) is distance expiration’s. The cost of any such debit spreads would be spread out of the time of multiple trades.
- I want the edges of my profit zone to be larger than the center of the profit zone.
- I want to shy away from trades that requires 30-40 days to come to fruition. That does not mean that I will not have position strategies in expiration cycles that are 30-60 days in the future, but I will use Combination Strategies embedded into the position in an effort to earn reasonable returns within the shortest time period possible. Less time in the market translates into less risk, if done properly.
It a short list that would be a good start for the serious trader.
“The Options Boss”