Strategic Adjustments in a High-Risk, Low-Volatility Market
• Discussion on trading in an environment with low volatility (zombie land VIX) and how to adjust strategies accordingly.
• Emphasis on maintaining small trade sizes and avoiding overexposure due to the lack of clear market structure and high perceived risk.
• Explanation of the importance of capital preservation over profits, especially when market conditions are uncertain and edges are diminished.
• Introduction of the concept of expanding and contracting trading exposure based on market conditions, akin to adjusting driving speed in varying weather.
• Exploration of the potential benefits and risks of combining different trading strategies, such as the “big ass fly” with out-of-the-money flies, particularly in volatile conditions.
• Practical advice on using Thinkorswim’s analyze tab for portfolio management and understanding the impact of volatility on real-time profit curves.
Summary
Ernie provided guidance on navigating a market environment characterized by low volatility and the challenges it presents for traders. He emphasized the importance of small trade sizes and careful risk management due to the lack of clear structural elements and the high perceived risk at all-time highs. The discussion highlighted the need for capital preservation over profit-seeking, particularly in uncertain market conditions where trading edges are slim.
Ernie introduced the idea of expanding and contracting trading exposure based on market opportunities, comparing it to adjusting driving speed in varying weather conditions. He also explored the potential benefits and risks of combining different trading strategies, such as the “big ass fly” with out-of-the-money flies, especially during periods of high volatility.
The session concluded with practical advice on using Thinkorswim’s analyze tab to manage portfolios and understand how volatility affects real-time profit curves, reinforcing the importance of disciplined and informed trading in a challenging market environment.