Issue 128: Do This Before Major Economic Announcements - Masters in Trading Digest

Do This Before Major Economic Announcements

I’ve been pounding the table about risk in this market.

It’s not that I’m an alarmist, but I would sincerely advise folks with market exposure to understand the risks in front of them.

This is such an important topic that this past Friday, we held a special 2-day event to pound the table about short-term risks in the stock market right now.

The two-day session focused on the shape of the VIX Curve and highlighted risks toward the front end of the Vix.

What is VIX Term Structure?

VIX term structure is the term used by CBOE for a set of calculated expected S&P500 Index volatilities based on S&P500 options of different times to maturity. The methodology of the calculation is the same as that used for the VIX Index itself. The difference is that VIX Index is one number measuring expected volatility for 30 days ahead, while VIX Term Structure is a set of several numbers measuring expected volatility for different time periods.
– Investopedia

A Trader's Approach to Major Economic Announcements

Many of these financial announcements have an impact on all markets, such as monthly unemployment reports, FOMC interest rate decisions (and subsequent press conferences by the FOMC chairperson), political elections, and more.  Also, while not impacting markets across the board, many events and releases can have a significant impact on the specific products you are trading – such as equities earning releases, central bank meetings from countries outside the US, the time period around contract rolls for various futures, etc.

At Masters in Trading, we strongly believe that position management can make or break a successful trader, so it’s prudent for traders to de-risk when volatility increases.

Major economic events should be dealt with the same.

Heading into these financial events, consider reducing your position size, or for short-term traders, consider having no position at all (also known as being flat).  Doing this not only reduces risk, but it also gives you more ammunition – the ability to enter into new trades.  

In the futures trading groups I managed, I would always tell my traders to have no more than one-third of their maximum positions heading into monthly unemployment releases or an FOMC interest rate decision.  I wanted them to be able to triple their position size if the setup was right.  Again, a benefit of impactful releases is that they often create new trading opportunities – (although let’s give it a little time after the event for the market to settle in).  

Wouldn’t you rather be more focused on new opportunities than a rapidly declining account value?

If you are carrying positions into major releases and events – consider if there are ways to hedge your position.  If you’re short equity options heading into an earnings release, butterfly the position off by buying the wings.  If your currency portfolio consists of “risk-on” positions heading into an important international election or rate decision, buy some traditional safe havens, such as the Japanese Yen.  VIEW YOUR HEDGES AS INSURANCE POLICIES.   Remember, first and foremost – protecting your account is the top priority.  While these impactful events could benefit your position, they are the most likely path to an instant stop-out or worse.

So make sure your position is light or flat heading into highly impactful events and economic releases.  And look for ways to hedge the positions you are carrying.   

This week we shared three trade ideas with our Options members.  Two of those ideas are Bullish, one is Neutral.  Traders who enter trades should consider a balanced approach with some of that risk “bullish” while another risk in your portfolio is “bearish.”  This is what creates a balanced portfolio.

As traders – we should be patiently waiting for an opportunity, and when we enter into trades, we normally aren’t expecting instant results.  We have put on intelligent, well-thought-out positions with multi-day and multi-week time horizons.  The problem with taking these positions into an impactful release is that everything turns into a coin flip at the moment.  Markets can significantly trend, especially if the result is the slightest bit off from what was expected, causing traders to get stopped out of positions quickly.

Worse, when results are significantly off expectations, markets can have gap moves, which cause stops to be triggered at levels far worse than intended, forcing the market to trade at levels never thought possible.

A perfect example – the 2016 BREXIT VOTE – saw CBOE British Pound Volatility Trade to unseen levels at that time.

Masters in Trading Digest - Issue 128

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The next issue will be released on Wednesday.

Until then, trade smart and always manage your tail risk.

Thanks for reading,
Jonathan Rose

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