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Manage Risk in a Volatile Day

📘 Case Studies, Trade Structuring
Manage Risk in a Volatile Day

The Federal Reserve has started 2024 trying to stabilize what was said at the end of the year. Looking at the Fed minutes from December, what was clear was that the Fed members are looking to keep rates higher for longer until inflation is actually tamed.

In general we had a volatile start of the year. This means that more than ever, you have to be on top of your risk management especially if you are looking at structures that sell options. On this point we wanted to cut and paste a summary from the Trade Structuring Channel by one of our main traders. You can access this Channel via the Premium Membership.

The main topic is trading and risk managing during a volatile day. He just walks the other members through his logic, and how he managed risk throughout the day yesterday ending with a $3K P&L.

trade structuring

Please read on here:

So all out of my 0DTE IC, very nice profit. Sold both Put Call Spreads (pcs) and Call Credit Spreads (ccs) at open for 0.5 (4680/4660 and 4755/4775, respectively), set my Buy to Close (BTCs) for 0.15 as usual, and then fired up my Playstation 5 controller while managing. This is why I’m writing this note: to bullet point what happened.

  • Day was very bearish as a set-up, so clearly more worried about the puts, of course. I sold well under 4700 (the Before Market Open Put volume leader). But we still didn’t want the market to get close there, because what if they targeted lower and I had to get out? As soon as the market opened, I had my eye with special attention on 4700p with those big vol signals that came in before the open. What I ideally wanted to see was them getting out – an identical-ish vol signal at that contract.

  • I got filled, and we immediately dumped to confirm the bearish overtone of the day, and after a while my Call Credit Spread BTC got filled at the target 0.15. One less thing to worry about.

  • Now, the puts.I kept looking at those 4700, along with 4710p, 4690p, — just to get a sense of what market makers wanted to do. I also knew that today’s event volatility plat du jour that everyone was waiting for was the upcoming FOMC minutes, released shortly at 2 PM. I did not want to stick around as an options seller during that. So the game plan was then divided to a two-pronged approach: use any pop up to exit the puts at a profit, and 2. (in order to get to 1), use analysis to see if we’ll go down/up.

  • Using the old targeting system I keep nagging about (read everything above), I kept my eye on 4700p. Market participants never got out of them so I was worried, naturally. But what I did NOT see was a new volume added there or below. So the market was dumping, but why? Where was the volume? What puts were being bought? Without going into too much detail, further chain analysis then showed market makers were hedging for longer-dated expiries, which drove the market down.

  • Having no targeting added for 4700p or lower (nothing bearish), I decided to hang on to those puts until new data (I keep checking/managing continuously) would show me otherwise. Meanwhile, the market (SPX but mostly QQQ) held on to Menthor Q 1D Exp min like a champ (I also checked QQQ chain, VIX chain, etc., different expiries, 1dte, 3dte, whatever).And then, we got the pop and as soon as I got my 0.3 cents to get out, I filled the order and exited at a very nice profit. Again, I could have stayed for the original 0.15 BTC, but I don’t want to be in an Iron Condor during event volatility.

These were the levels for the day on SPX.

SPX 2024 01 03 17 10 36

So this was just an example of how we manage a volatile day with an Iron Condor. This may be overwhelming, but it shows you the type of work you have to do to become a good trader and risk manager. Our platform provides you with free and premium tools for you to get there!

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