thinkMoney - Fall 2019 - 45

October 2019

In this issue:

  • Volmageddon: How to Trade a Crash
  • It's your Loss. What Are You Going to Do?
  • Delta: A Little Goes a Long Way
  • How to Hedge Your Basket



Bring it on!

• DO THE OCTOBER JITTERS keep you up at night worrying that the markets might crash at the open? Maybe some breaking news came out that could impact the markets. You have open positions and are cursing yourself for not closing them earlier. Anything could happen overnight—trade deals gone awry, global turmoil, or just plain fear—that could make traders anxious. And given that some of the most notable market crashes have taken place in October, it’s not unusual to find traders crouched under a table, rocking back and forth, waiting it out for the month.

But volatility (vol) is part of the game, and as a trader, you have to know how to deal with it. And it can happen at any time. To confront vol, you need a plan, the discipline to exercise that plan, and a superhero attitude to take on anything that comes your way.

Our cover feature, “Volmageddon: How to Trade a Crash” on page 16, talks about strategies you could use as markets are going down. Whether you hold stocks for the long term, are
comfortable trading in a volatile environment, or are a baller trader willing to go large, there’s likely to be a strategy you could use and incorporate into your trading plan.

But how do you come up with a trading plan so your strategies aren’t obsolete? One way to go about it is to create a decision tree. It’s like putting game theory into action. In “It’s Your Loss. What Are You Going to Do?” on page 22, we walk you through the process of creating the different branches of a decision tree. Traders often have strong reasons to enter a trade, but no matter how strong the reasons, things Bring it on! can go against you, and you need to know when to make that exit. Using a decision tree can make the process more logical and less emotional.

Even if your portfolio is made up of stocks for the long haul, there may be times when you have to make adjustments. Every position—long or short term—needs to be protected. There’s no such thing as “set it and forget it” when it comes to trading. In “How to Hedge Your Basket” on page 30, you’ll learn about ways to size up a portfolio hedge using index options and some different strategies to consider for various market scenarios.

So, in case you hadn’t noticed, the theme for this issue is a nod to the possibility that things are changing. Of course, we have no way of knowing which way this market will go next,
but when vol increases over prolonged periods of time, as we’ve seen in 2019, it can’t hurt to learn a cautiousst rategy or two.

Happy trading,
Kevin Lund
Editor-in-Chief, thinkMoney