Why I Uncharacteristically Reduced My Risk Exposure

Why I Uncharacteristically Reduced My Risk Exposure

Posted On June 18, 2021 1:59 pm

Yesterday, stocks initially shrugged off the Fed’s policy and follow-up statements despite a growing sense that higher rates, and an asset purchase level reduction, may arrive sooner than previously thought.  In fact, the Nasdaq 100 (QQQ) actually ripped to a new all-time high in the final hour of trading. 

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Today stocks are sinking, at midday all down over 1%, making it the worst day for the S&P 500 (SPY) and QQQ in over two weeks, as traders are seemingly rethinking the ramifications of a less-accommodated Federal Reserve.  The catalyst for reassessment and selling came when St. Louis Fed President James Bullard stated in a CNBC interview that the Fed’s now “tilted a little more hawkish,” among other statements — suggesting policy changes could arrive by the end of 2021.  This stands in contrast to the Fed’s prior commitment stance of zero changes until late-2023 or early-2024. 

Stock futures declined seemingly as soon as words came out of Bullard’s mouth and the selling accelerated once the open bell rang.  As discussed, stocks were in need of a pullback, with the recent narrow range and low volatility setting up for a potential sell-off. 

This is what prompted me to uncharacteristically reduce exposure by closing, or aggressively rolling positions earlier in the expiration cycle — the reason I added a hedge in the QQQ’s using the put option backspread strategy that I explained in this article: How I’m Positioning for the Fed.  

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This brings me to today’s small trading lesson; You must make decisions based on opportunities and market action.  Too many people trade with an eye on money and/or the clock. Sure, money goals such as making a certain amount per month is a good thing.  Also, you need to be aware of how options time decay (theta) impacts your position. However, it’s best to let those be the basis for your trading decisions.  For example, some options traders will only buy or sell within 40 days until expiration and only close out positions once when at 10 days until expiration — regardless of market conditions.  

Quick analogy; I went to New York City last weekend to see my children. More than one person asked why I didn’t wait until this Father’s Day weekend to be with them. My answer was simple: It would’ve been my last opportunity to see my son play soccer until October. That’s what I cared about, not some random Hallmark-created holiday to sell cards. A nice byproduct of this decision was that it took the pressure off my kids of thinking they’d have to “do something” for me on that supposedly special day. 

Likewise, in trading, take action when the best opportunities present themselves, no matter when they occur, which will prevent you from forcing trades.  If you focus on good risk/reward opportunities, the money will undoubtedly take care of itself. 

Have a great Father’s Day.  I already had mine! 


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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.