When the markets are experiencing a major catalyst — like Fed’s FOMC meeting and Chairman Jerome Powell’s speech yesterday — you can’t trade the same way you do during a normal week, expecting similar results.
Even though the major question has now been answered (the Fed announced yesterday that it will hike interest rates by 25 basis points, as expected), there’s still an enormous amount of uncertainty as to how the market will react over the next few trading days.
In times such as these, I find it’s better to wait until after the catalyst (playing the reaction) rather than placing a “sports bet” before the whistle blows.
Notice that I didn’t try to put any trades on or make any heroic predictions before the Fed meeting.
This comes from experience. After so many years of trading, I’m more than comfortable sitting on the sidelines and waiting for the news to hit before placing my bets.
But now that the big question mark has been answered, it’s time to think about the specific considerations options traders need to keep in mind for today and tomorrow.
If you don’t follow these rules, your account could get body-slammed during this volatile week of trading.
With that in mind, keep reading and I’ll explain my game plan for the rest of the week.
Stick to the Tickers You Know Best
It’s not the time to get fancy when the markets are extra volatile.
During weeks such as this one, I recommend trading tickers you’re familiar with and charts whose personality you understand.
Take a look at the tickers from my past several trades…
- ProShares Bitcoin Strategy ETF (NYSEARCA: BITO)
- Marathon Digital Holdings Inc. (NASDAQ: MARA)
- Coinbase Global Inc. (NASDAQ: COIN)
- Tesla Inc. (NASDAQ: TSLA)
Notice anything in common? Hint: They’re all names I’ve traded in the past (and charts I look at every single day).
Are there possibly better setups out there out of the thousands of tickers in the markets? Maybe…
But I’d still rather trade the charts I know like the back of my hand than spend countless hours scanning my watchlists for a new and exciting setup.
This is even more true when there’s a major FOMC decision on the minds of traders.
Extra volatility means extra unpredictability … so why would you trade anything other than the charts you’re most comfortable with?
Stick to what you know and I bet you’ll find more confidence in your trading.
Stay Close to the Money
One of the best parts about options trading is that it allows you to build strategies in so many different ways.
But if you’re not careful, this luxury can bring danger to your account’s doorstep…
If you don’t know the potential perils of choosing a far out-of-the-money (OTM) strike price, you could get yourself into an account-ruining trade.
First, let’s talk about strike prices — the price the underlying stock needs to exceed by your expiration date for your contracts to pay out.
If you buy a contract that’s far out of the money — and the underlying stock hits that number by your expiration date — you’ll make a bigger % gain than if you had bought at-the-money (ATM) contracts.
This temptation often lures newbie options traders into a trap. They look at the ‘max profit’ on the trade and think they’re gonna make it, but that’s a mistake.
If you buy ATM contacts, and you’re right about the direction, you’ll still make a much larger % gain than if you simply buy and sell shares.
On the other hand, if you’re holding OTM contracts and you’re wrong about the direction — even for a few hours — your position could lose more than half of its value.
WARNING: This week, your wrong-direction contracts will lose value quicker than normal due to extremely high implied volatility (IV) on the contracts. (Yet another reason to stay close to the money!)
Bottom line: Don’t shoot for a crazy price target this week. If you’re gonna put a trade on, be realistic and pick a strike price that’s close to the money.
NOTE: I usually trade strikes that are very close to the money, but slightly out of it (which gives me the perfect risk/reward for my risk tolerance).
All in all, there’s nothing wrong with sitting on the sidelines this week.
Heightened volatility and unpredictability are to be expected. Plan your moves accordingly.
But if you do trade the post-FOMC madness, follow the two rules I outlined today to increase your chances of success.