Risk of Wishful Thinking When Trading Options

When the stock market is having a terrible year a common strategy to try to time the bottom and buy at bargain prices. When that bottom never seems to come there is a risk of wishful thinking when trading options, trading stocks directly or investing. Many end up trading the market that they want instead of the market that they have which can be a real problem. We may be seeing that right now as market sentiment shifts to the belief that the Fed and other central banks are going to stop raising interest rates.

Is the Fed Going to Inflict More Pain or Not?

Every time that Fed Chair Powell suggests that he does not want another taper tantrum the market rallies. When he says clearly that the US economy could go into a recession as the Fed keeps raising rates the market tanks. Since the Jackson Hole Symposium Powell and company have been consistent with their message that they are on course to keep raising rates. The belief that the Fed will now quickly relent and taper off on their rate increases seems misplaced at the current time. The Fed will eventually back off but they are likely to do this only when there is tangible evidence of lower inflation. Even though they are changing the rules about when we are in a recession the nation is not yet at the point where the Fed is likely to do an about face.

Always Hedge Your Option Trades

We sign off from all of our videos by reminding our listeners to make sure to hedge. The beauty of this approach is that even if you fall prey to wishful thinking and get caught in a really bad trade your losses will be limited. In addition to using hedging strategies in specific trades, a successful options trader needs to consider the entire range of factors that can drive the markets when trading. Then they need to hedge their entire approach to the market based on all factors. As we have previously noted, the market will likely go up when the Fed decides to back off from raising interest rates as rapidly as they have. However, the Fed easing off on interest rate increases will pale in comparison should Vladimir Putin choose to use tactical nuclear weapons in an attempt to stop Ukraine’s successful recovery of territory both in the east and in the Kherson region in the south. And a market response to the use of tactical nukes will pale in comparison to what happens if NATO becomes directly involved in Ukraine and it turns into a full fledged battle between the West and Russia. Likewise, should China choose this moment to move on Taiwan or North Korea quick testing their rockets and actually attack South Korea or Japan any of these events would have devasting effects on the markets far outweighing any short term actions by the Fed.

Options Trading Skills and Options Trading Squadrons

At Top Gun Options we teach how to trade options. Starting with the basics we will take you up to advanced options trading strategies. But no matter how high your level of skill in trading option this is not a good time to be trading alone. By joining one of the trading squadrons at Top Gun Options you are aligning yourself with traders who potentially print money no matter which way the markets are headed and no matter to what degree other traders are engaging in wishful thinking. We have called the recent market shifts, often to the day, and successfully dog fight the market when volatility takes hold and trends are hard to find.

Popular Topics