{"id":13704,"date":"2011-08-05T13:45:44","date_gmt":"2011-08-05T17:45:44","guid":{"rendered":"http:\/\/www.smbtraining.com\/blog\/?p=13704"},"modified":"2023-04-17T15:43:25","modified_gmt":"2023-04-17T19:43:25","slug":"traders-ask-why-did-i-hit-my-stop-much-earlier-than-i-thought-i-would-yesterday","status":"publish","type":"post","link":"https:\/\/www.smbtraining.com\/blog\/traders-ask-why-did-i-hit-my-stop-much-earlier-than-i-thought-i-would-yesterday","title":{"rendered":"Trader’s Ask: Why did I hit my stop much earlier than I thought I would yesterday?"},"content":{"rendered":"

I had an interesting meeting yesterday evening\u00a0 with SMB’s options trainees\u00a0 reviewing yesterday’s meltdown and the affect\u00a0 it had on their options positions.\u00a0 We spent the whole meeting dissecting trades that the options trainees had made during the day. breaking down what went right and wrong with each one and why.\u00a0\u00a0\u00a0 It was a great meeting–real traders faced with the real issues that impact options spread traders on monster moves like yesterday’s historic sell-off.\u00a0 Day’s like yesterday are rich with lessons that we can all draw from.<\/p>\n

One of our trainees, Rob, \u00a0 unable to trade manually while the market is open 95% of the time due to the nature of hisjob.\u00a0He must operate through contingent orders placed with his online broker. This trade\u00a0 management technique can work fine, but it takes some extra work, care and analysis.\u00a0 Yesterday, Rob placed a stop order on one of his\u00a0 iron condor positions assuming that his stop would be hit when the $OEX index hit 545. The dollar loss that would have resulted according to his analysis was within our guidelines\u00a0 given the success rate and average gain that is typically made using this trading technique over the course of a year.<\/p>\n

Unfortunately, by the time\u00a0 his contingent order was actually triggered, Rob’s trade had exceeded, somewhat,\u00a0 the acceptable loss level.\u00a0\u00a0 Rob was interested in why his analysis was apparently inaccurate.\u00a0 The answer was simple, but not obvious on the surface.<\/p>\n

An iron condor is a negative vega trade.\u00a0 In English,\u00a0 that means it responds well to drops in volatility and poorly to increases in volatility. Well it just so happens that yesterday’s meltdown generated\u00a0 the sixth largest rally\u00a0 in the history of\u00a0 the\u00a0 $VIX. Needless to say, when Rob was analyzing where to place his stop, he did not consider that to be a very likely outcome of the trading day.<\/p>\n

So as a group we went through the process of how to incorporate bumps in implied volatility in a sell off into the analysis process for setting up a stop on a negative vega trade before the market opened. It turns out\u00a0 that the stop, with reasonable volatility assumptions would have actually been five points sooner than Rob had anticipated. We then went through a simulation together of that actual\u00a0\u00a0 trading day using that volatility\u00a0 assumption and, sure enough,\u00a0 the stop would have occurred about five points earlier–saving Rob some money.<\/p>\n

So the lesson is this: when setting stops on options spread trades, you must not only consider\u00a0 the amount<\/em> of the move on the stock or index\u00a0 that you are trading, but the likely change in volatility which\u00a0 that same move would bring about \u00a0 in the implied volatility of the entire position.<\/p>\n

This is a\u00a0 really important issue\u00a0 and can make the difference between a timely stop and blowing well past a tolerable\u00a0 level of loss.<\/p>\n

Seth Freudberg<\/p>\n

Director, SMB Options Training<\/p>\n

The SMB Options Training Program<\/a> is a program designed for novice and intermediate level options traders who are seeking an intensive training process to learn how to trade options spreads for monthly income. For more information on this program contact Seth Freudberg: sfreudberg@smbcap.com<\/a>.<\/em><\/p>\n

Risk Disclaimer<\/a><\/div>\n","protected":false},"excerpt":{"rendered":"

I had an interesting meeting yesterday evening\u00a0 with SMB’s options trainees\u00a0 reviewing yesterday’s meltdown and the affect\u00a0 it had on their options positions.\u00a0 We spent the whole meeting dissecting trades that the options trainees had made during the day. breaking down what went right and wrong with each one and why.\u00a0\u00a0\u00a0 It was a great meeting–real traders faced with the … Read More<\/a><\/p>\n","protected":false},"author":741,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1,1402,1584,908],"tags":[4698,1646,1598,1259],"class_list":["post-13704","post","type-post","status-publish","format-standard","hentry","category-general-comments-2","category-options-education","category-seth-freudbergs-blogs","category-traders-ask","tag-options-mentoring","tag-options-spreads","tag-options-strategies","tag-options-trading","no-post-thumbnail"],"yoast_head":"\nTrader's Ask: Why did I hit my stop much earlier than I thought I would yesterday? | SMB Training<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.smbtraining.com\/blog\/traders-ask-why-did-i-hit-my-stop-much-earlier-than-i-thought-i-would-yesterday\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Trader's Ask: Why did I hit my stop much earlier than I thought I would yesterday? | SMB Training\" \/>\n<meta property=\"og:description\" content=\"I had an interesting meeting yesterday evening\u00a0 with SMB’s options trainees\u00a0 reviewing yesterday’s meltdown and the affect\u00a0 it had on their options positions.\u00a0 We spent the whole meeting dissecting trades that the options trainees had made during the day. breaking down what went right and wrong with each one and why.\u00a0\u00a0\u00a0 It was a great meeting–real traders faced with the ... 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