Protecting Your Trades During a Market Sell-Off

We are seeing a continuation of the selling that we saw yesterday. This is a follow through from last Friday when the rally faded intra-day. Market watchers are expecting a poor earnings season on the order of what we saw in 2009, so for many it is only prudent to take profits.

Yesterday, I added the put hedge to an iron condor that I am tracking for Trading Room members which we had discussed during on of our regular live training sessions. That position is holding up well in today's continued sell-off.

During that live training session we talked about the idea of ta "daily fire drill." Take some time today - and every trading day - to review each position in your account and ask yourself how you would feel about the trade if the market made a one standard deviation move higher or lower tomorrow. Then ask yourself about a two standard deviation move.

Each Weekly Market Report published for Trading Room members includes the one-day standard deviation for three major broad market indexes for this purpose.  Also, our Trade Worksheet will calculate the daily standard deviation for any underlying that you may be trading.  The Market Report and Trade Worksheet are both available in our Trading Room.

If a one day move has the potential of inflicting damage, look for ways to hedge off that risk. With implied volatility so low, it can often be accomplished with something as simple as the purchase of one or more long options.

The key to long term profitability is the avoidance of large losses and the best way of avoiding them is to manage your risk of loss on proactive basis. That means making the adjustment or putting the hedge on before trouble strikes.

Check your positions. Mind your risk.  If you need some help learning this skill set, consider joining us in the Trading Room.

Christopher Smith
TheOptionClub.com

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