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Don’t let the government shut down your trading

It seems that all I hear about these days is the government shutdown and the debt ceiling. I have people telling me that the market is untradeable with all this uncertainty. The market is an emotional mess, not knowing which way to go from day to day. Well I’m not a day trader so it hasn’t changed my trading much.

I am an options trader. Options trading allows me to pick the time frame I want to trade and exactly how I want to trade that time frame. I can chose trades that require laser accuracy or trades that are very forgiving. I don’t have to be right, I just can’t be completely wrong.

My trading is mostly technical/sentimental . I trade equities that are “best in class” so the fundamentals are typically steady. I tend to trade on a quarterly basis and find that lots of equities “act” like they did the previous year. So for this time of year the market tends to trade in a channel.

Yes, it seems that every year from June to December for several years now, the market has found a reason to trade in a range. So while I can’t predict exactly when the market will bottom or find a top I can expect it to find a bottom and find a top. I can also see what is making the market trade in that range. Once those things are resolved I can expect the market to rise, until it finds another reason for it to trade in a range around June. Some years that resolution comes earlier than others. This year it may come earlier than last year but later than some previous years.

So how can you trade this uncertainty? You can predict when the latest uncertainty will end and place trades that end after the uncertainty. Make sure you have your secondary exits in place and then wait for the trades to come in. That is the hardest part, waiting.

To place trades that are really “forgiving” you typically have to wait for the market to establish a channel. Once that channel is established you have to wait for it to get to the best place to place that forgiving trade. You can choose just how forgiving the trade is with options. That typically means less profit than a less forgiving trade but it means an increase in the probability of the trade working. The profits from option trades can be very lucrative. During times of uncertainty those profits can still be very lucrative, just less lucrative than in times of certainty. The challenge is to not be greedy and to not force trades.

During this time of channelling I can typically be certain that an equity will be above a certain level some time in the next three months. Using options I can go well below that level, and further out in time with a trade. I profit if time passes and the equity stays above that level. I can be certain that time will pass. I can typically pick a value that everyone would agree that an equity will be above. Take the SPY as an example. If you believe, as I do, that the SPY will be above 160 the third week in January, there is a very lucrative trade for that. If the SPY moves up I can take that trade off for a very nice profit long before January. There is a complementary trade if you believe the SPY will be below a level in January.

I don’t have to pick a bottom to put the trade on. I can put on say 10% of the position at one price level and 10% the next day if it stays at or below the price I like. Typically over the 10 days that I’m putting on the trade, I hit the perfect day to place the trade. The whole position will be profitable, some entries will be more profitable than others.

It is very important to me that I know what to do if I’m way off. I know how to turn the trade profitable if my expectation changes. There are multiple ways to do it. I have technical triggers that I use to make those adjustments and I have the adjustments plan before I place the first trade.

During times of high predictability make lots of money. During times of uncertainty make more money that non-options trader can imagine, just not as much as during times of certainty.

So don’t let the government shut down your trading. Modify your trading to make money in uncertainty.

Ken Bailey
OptionsANIMAL Instructor

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