Is This Strategy The Solution to Choppy Market?

It is no secret that the market has been rough lately…

Chart candles are swinging violently in both directions and so are the moods of traders behind the screens.

When emotions run so high and people get overly frustrated and excited at the same time – the market tends to get choppy.

Unless you’re a quick-witted scalper, a choppy environment is usually not a fun place to find yourself in. 

Ben Sturgill may have given the best advice in my letter from yesterday: “the name of the game right now is be nimble with short term trade and take the money and run.”

But I understand how hard it may be for some of you to take only small & short-timed trades when there’s seemingly so much stuff happening. 

So, here’s one unconventional strategy that I’m planning to use right now. 

Options are a great tool in any trader’s arsenal – they allow you to significantly leverage your bets and multiply the returns on even the smallest moves in the underlying stock.

There’s only one problem with them – when volatility runs highs (as it does now), options premiums become very expensive. 

When the market is shaking, options sellers demand higher prices to compensate for added risk, hence contract prices can get sky high. Thus, in a market such as this one, it becomes increasingly hard to be an option buyer – the risk/reward is simply not worth it. 

You’ll need a major move in the underlying to make a meaningful return, but you’ll only need a small move for the premium decay to do big damage to your contracts.

So, I figured, if the risk/reward in buying options is currently skewed against me…

Why wouldn’t I reverse the trade and bring the odds back into my favor?

Selling the Extremes 

If it’s really hard to buy, it’s probably a good time to sell, right? Basic laws of supply and demand. 

Yes, but with caveats. 

Here’s my plan for the current chop:

“I want to sell Put spreads far out of the money on days where the market drops a lot and then do the opposite with Call spreads on days the market rallies”

That’s right! Remember I said that the premium decay will kill the value of contracts very quickly if they go the other way?

Well, this is exactly what I’d like to capitalize on – sell those contracts short and bet on quick premium decay when the underlying reverses short-term course.

I’ll be looking for extremely short-term readings to the upside or downside in the market and market-related stocks and selling the expensive premiums on those.

Keep in mind, options selling involves many risks as in the worst-case scenario you stand to lose more than you put in.

To protect myself, I’m planning to avoid “naked selling” and will use strategies such as Covered Calls or Married Puts. 

Come see me in The Wall Street Octagon to know exactly which trades I put on and when!

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