The crazy roller coaster in the Israeli market and in the world markets made me very busy. The Israeli market was very volatile and exciting at the same time. A true trader thrives in these situations.
The public and press are always behind
A nice indicator I use, is what I call the crowed and press indicator. It is usually the case that if the public and press think a big decline is going to happen then it usually won’t happen and vice versa. The problem of course is to capture that sentiment. That is why I like to go to forums and see what is up with the people or get up to speed with all the financial press and analysts. It is not science but is gives me an idea. It was pretty funny to see that after the big decline that nobody had expected, the press was all over it saying that tomorrow there will be another big decline. This goes back to the black swan that people overestimate rare events after they happen and vice versa.
How it all went down
On the 25 of July, the market closed at 1166.63 which was a record high. The next day it went down to 1,137.12. A 2.5% decline. This set panic and caused the market to go down by 4% the next day. After that, there were talks about how the market would now crash and it was all expected. That is where you have to tell to yourself that the public is usually the last one to know anything about anything(including the financial press). For them, it was a big surprise that the market went up almost 3% in the next two days. After that, the roller coaster continued with ups and downs almost every day. Today the market closed at 1068 points. What is the lesson? Panic and Euphoria are good for traders.
Out-of-the-money options
I cannot go into specifics on how I exactly trade options, but I just want to say that the panic of the crowed could be exploited. Let’s just say that for some reason, the public always buys the deepest out-of-the-money puts in a decline.
Risk adjustments
I should make a bigger post on this one. Option traders use the delta to monitor their exposure in their position. The black and scholes delta could be way off than the real delta. A better way is to just observe the delta from the prices. This means seeing how much the price of an option changed relative to the change in the underlying. If you don’t fully understand what I mean don’t worry. I’ll make a bigger post on “discrete” greeks in the near future.
Final note
It has come to my knowledge that this blog was ranked in the Top 100 Day Trading Blogs. I am happy that people find what I write informative. That is on the top of my mind when I write each entry in here.
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I have found a lot of opportunity taking an option position and then trading stock around it to control my risk while allowing overblown premium to dissipate. The volatility can be frustrating and exhausting, but if you manage your risk carefully, it can be very rewarding!
I think the thing that happened in last few weeks was a global effective phenomenon. What happened in US had made a nervous breakdown among investors from all over the world which was making the stock market from all over the market more volatile, but from my point of view it was a investor’s paradise which gave a very good opportunity in entering good quality stocks which was quite expensive back before this volatility.