Market Volatility: Trade Cautiously But Without Fear

by Options Sensei

Being a market prognosticator often means spewing thoughts and opinions to create content well beyond the reality of underlying activity.  I should know, after working with Jim Cramer — the sound bite-creating master — making table-pounding proclamations and outrageous predictions, all the while, under the surface, acting as a rational, risk-averse portfolio manager. 

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I give Cramer credit for putting himself on the line daily and finding a public and private persona balance. But, it must be exhausting.  Less charismatic in the industry, or those that have different priorities and a higher career risk of being “Wrong!” tend to couch their predictions in mushy language such as “cautiously optimistic.” 

Following yesterday’s “Will Q3 Earnings Season Kill the Bull?” article, and in light of today’s big rally, I’d like to answer the following reader’s question: “Why would you turn bearish and how big are your losses?”  Trolls gonna troll. 

First, let me be clear when I discuss potential negative market catalysts, such as inflation; it’s simply done in an attempt to assess and manage my risk.  This doesn’t mean that I’m turning into a growling bear, I’m simply covering all my bases on what could go wrong with this long tooth in the bull. 

How those words translate into action means I’m paring positions, taking some profits, and reducing overall risk. Since August 1st, Options360 has closed 19 positions, with only 3 of them being bearish, and 2 producing a profit. My caution comes into play in the profit-taking and taking money off the table.  

In the past three weeks, Options360 has closed bullish positions for the following gains: iShares Russell (IWM) +65%, The Trade Desk (TTD): +52%, Alibaba (BABA): +29%, and  Advanced Micro Devices (AMD):  +62%.   

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As described above, plenty of profits came from the long side even as the market struggled through most of September and early October.  The portfolio’s now down to just three open positions; all of them are bullish. 

Yes, I’m still cautious but that can’t cause me to trade scared. In fact, by having secured profits and pulling money off the table, I’m now free to turn “cautiously aggressive.”  Meaning, the last thing I want to do is get defensive just to protect my lead.  Instead, I can actively pursue new setups with defined risk parameters that will build our current gains. 

Currently, there are a lot of competing market forces at work, creating a dynamic environment full of opportunities.  There’s nothing wrong with being cautious, just don’t let it prevent you from taking action. I anticipate myself being very active as we head into 2021’s final months. 

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