The period leading up to the FOMC — and especially the FOMC itself — have a habit of generating high volatility trading sessions. Here’s 10 simple tips to trade them with options.
During 2022, Fed-influenced events generated some of the largest intraday moves of the year in the indices.
Trading options during high volatility days can be challenging, as the market can feel unpredictable and prices can fluctuate rapidly. However, there’s no better tool to tackle high volatility than options. With the right strategies and mindset, option traders can still prevail during these periods.
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Here Are 10 Tips for Trading Options During High Volatility
- Use risk management: Risk management means a few things. Having a set idea of where your trade will be rolled or sold — That’s risk management. Knowing how much of your overall account to can risk (consider AJ Monte’s 1% Rule) on a particular position — that’s risk management. Keeping your risk under control is key to trading during high volatility Fed-influenced days.
- Use technical analysis: You don’t have to be a CMT to deploy some basic technical analysis tips. For instance, look for signs of reversal candles (like gravestone doji’s, for example) that come pared with high volume for a chance at taking a contrarian trade against a volatile intraday trend.
- Keep an eye on the RSI: The relative strength indicator, or RSI, is a simple indicator you can use on any timeframe in order to help craft and manage trades on volatile days. When the RSI is above 70, that’s a good sign that the stock or security is overbought. Likewise, when the RSI is under 30, that’s a good sign that the stock or security is oversold.
- Use protective stops: One of the most important strategies for trading options during high volatility is to use protective stops. These are orders that automatically close a trade if the price of an option moves against you by a certain amount. This can help limit your losses if the market moves against you.
- Always use limit orders: Snappy market moves and high volatility means a market order may leave you with an unfavorable entry into a new position. Use a limit order to ensure you get executed at the price most favorably to you.
- Be aware of the implied volatility: Implied volatility is a measure of how much the market expects prices to fluctuate in the future. During high volatility, implied volatility will be higher, which will affect the price of options. Traders should be aware of the implied volatility when trading options and adjust their strategies accordingly. Additionally, in the moments following the FOMC event, much like the day following an earnings event, implied volatility will typically fall — which will also impact the price of options.
- Use volatility-based strategies: Another strategy for trading options during high volatility is to use volatility-based strategies. For example, traders who believe that volatility is heading higher can use long-volatility option strategies such as long calls, long puts, long vertical debit spreads, and even straddles or strangles, which are designed to profit from increasing market volatility.
- Be patient: High volatility can be stressful, but it’s important to stay patient and not make impulsive decisions. Traders should rely on their preset trading plan, not their emotions, to guide their trades, and take time to analyze the market before making a move.
- Be prepared to adjust your position: During high volatility Fed-influenced periods, the market can move quickly, sometimes turning on a dime over the smallest piece of news or commentary. It’s important to be prepared to adjust your position as needed. Stay nimble. This may mean taking profits early or cutting losses to minimize your risk.
- Stay informed: Keep a close eye on the markets and be aware of any news or events that may be causing volatility. Fed days are entirely driven by news, commentary, and the specific lines from Fed Chair Jerome Powell’s speech. Dissecting that language will help you to better anticipate changes in the market and make more informed trading decisions.
The Bottom Line: Don’t Be Afraid to Trade
These ten tips will help you to avoid getting “Fed fright” during the coming periods of volatility ahead.
FOMC days are the “deep end” of the trading pool — but that doesn’t mean you should be afraid to trade. It means you should go in armed with the guidance of trading professionals. That’s exactly what Market Rebellion offers.
While January 20th wasn’t an FOMC day, it was a big options expiration day, with plenty of volatility afoot — still, we weren’t afraid to get their hands dirty with 0DTE option trades. Our professional traders and licensed CMT’s help Rebels navigate that sort of volatility every single day. Discover what trades our Rebels are making today.