We spent a good chunk of Monday’s Option class talking about short-term risks to the stock market. In order to have consistent and sustainable results in trading, you need to protect against downside risks.

Here’s a snippet from Monday’s Option class video of this class – the warnings were clear. Many of you took notice and protected your account; congrats!

*4 days later, and the $390 puts are now $12.00

I wanted to credit my wife Carrie who got my wheels-turning about this short term trade idea.

Over dinner the previous evening, Carrie brought to my attention the local closings in the area amid the Omicron surge.  We then discussed short term risks to the economy. She was right, things are getting bad again, and the $VIX was trading low.

I thought of the recent behavior of the $VIX index..  Above is a chart of the $VIX volatility index… The red line shows a 9-day moving average and the yellow line shows a 30 day moving average.

Before things slowed down into Christmas break and the end of the year trade, the $VIX was elevated, trading over $30!

Going into this week’s Monday’s trade – $VIX (30-day) was trading mid $17’s and the VIX9D was trading $13. With the risks in the market, the $VIX was still priced like it was on Christmas vacation.

That’s the background to why so many members hedged their accounts.  This was a no-brainer, common-sense trade.

Matt picked up puts for $2.60, and today they’re trading over $12.00.  That’s $260 for each option (4 days ago) that’s now valued at $1,200 today.

As a floor trader at the Chicago Board Options Exchange, one thing becomes crystal clear – when volatility rises the overall market goes lower.

If the $VIX is a measure of volatility, and volatility is another way of saying: uncertainty. When any investment has uncertainty, the risk premiums are elevated, taking prices lower.  When the $VIX rallies the market will go down.

On a side note, protecting one’s trading account before moves like this makes traders feel smart, which leads to confidence, and is key to growing as a trader.

Again, congrats to all that acted.