The 2008 stock market crisis not only rocked the financial system and the world economy but also the pockets of countless options traders all over the world. Options traders who used to profit in the years prior to this market crisis broke their bank as none of their options strategies seem to work in this market anymore
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Options Trading in Extremely
Volatile Markets - Ebele Kemery
The 2008 stock market crisis not only rocked the financial system and the world
economy but also the pockets of countless options traders all over the world. Options
traders who used to profit in the years prior to this market crisis broke their bank as
none of their options strategies seem to work in this market anymore. So what is it
about extremely volatile markets and how should one profit through options trading
under such conditions?
Ebele Kemery says that the Extremely volatile market conditions not only produce
unpredictable short term stock price swings but also open up the bid ask spread of
individual stock options due to a lower liquidity and profiteering by market makers.
This combined effect not only made it doubly hard for options traders to make a
profit. Volatile options strategies, supposed to be meant for such conditions due to
their ability to make a profit when the market moves up or down strongly and their
ability to profit from an increase in volatility, also failed to produce any consistent
profits due to the higher premium outlay and wide bid ask spreads, soaking up most
of the profits.
Unexpected rallies also crunch volatility to the extent of producing losses through
decaying the premium of long legs at express speed. Short term (weekly, monthly)
directional options strategies fared even worse as it not only became almost
impossible to predict short term price swings but the high premium and bid ask
spreads also took most, if not all, of the profits away even if the stock did move in the
So what works in an extremely volatile market condition such
as this one?
First of all, let's look at all the different ways to trade options. There are 3 main
options trading methodologies; Swing Trading, Position Trading and Day Trading.
Swing tradingis a directional options trading methodology that aims to pick
stocks that will move quickly and strongly within a short period of time in a
predictable direction and then execute bullish or bearish options strategies in order
to profit from these moves. As mentioned before, trying to profit from directional
swing trading in an extremely volatile market is like swimming against the tide. Not
only is directions hard to predict in the first place but the high options premium
along with gapping bid ask spread all work against its favor.
Position tradingis more complex than Swing Trading as it aims to profit
mainly (although there are also position trading strategies that are directional in
nature) from volatility or premium decay through putting together several different
options and / or stocks in order to produce a hedged, market neutral position.
Position trading has produced some pretty profitable results for me in this market
crisis as volatility soared and options premiums are high. This puts the
disadvantages of an extremely volatile market condition in the favor of the options
trader. Such positions include dynamically hedged delta-neutral as well as delta-
gamma-neutral positions. Both of these position trading strategies aim to neutralize
market movement such that unexpected swings do not affect the position
significantly while the position safely takes the high options premium on the short
legs into your pockets.
Day tradingis an extremely dynamic options trading method where options are
bought and sold very quickly within one day in order to profit from the slightest
intraday price swing or change in volatility. This strategy was a pretty hard one to
profit from in low volatility market conditions as prices doesn't change enough
within a day to produce significant profits. However, day trading becomes extremely
profitable in the hands of seasoned options trading veterans in extremely volatile
market conditions such as this market crisis as the Dow itself has produced intraday
trading ranges of up to 10%! Yes, this is the kind of trading range and price range
that cannot be realized in normal market conditions. Day trading often takes the
form of simply buying or shorting call or put options and then quickly covering them
Day trading also avoids the extreme overnight uncertainties that so often catch swing
traders by surprise in this market crisis. Sudden overnight good news can often gap
the Dow up by a significant amount and closing it over 10% higher. This can wipe out
all your profits if you had been betting in the opposite direction overnight. Day
trading, however, is extremely risky for beginners in options trading as the price
movement is so fast and dynamic that when things happen, beginners may not know
what to do and be able to do it quickly. This is therefore not recommended for
Ms. Ebele Kemery has a decade of experience in Finance, Investment Management,
Sales, Trading and Commodities. Satisfy all risk management requirements.
Consistently promoted; recognized for development and leadership strengths. Ebele
Kemery has Strong analytical approach; full-tuition scholar from top-tier university
possessing a Bachelors in Engineering in Electrical Engineering.
To know more please visit: https://sites.google.com/site/ebelekemeryny/