When Your Risk-Management Strategy Stops You From Trading

I didn’t have a trade recommendation this week for my premium Income Trader service. And I want to talk about why. It all comes down to our risk-management strategy.

Normally, this tends to happen when we’re smack dab in the middle of earnings season, when it’s difficult to find trades that pass my screens because…

1) Broad-market volatility is elevated, which means a number of stocks aren’t on ITV signals, and…

2) Many of the stocks that are on ITV signals are also scheduled to announce earnings. (We don’t sell puts on stocks that will announce earnings while our position is open.)

And while there are still a few companies scheduled to announce earnings over the next few days, more than 95% of the stocks that make up the S&P 500 have already reported. So our problem isn’t wrapped up with earnings season.

No, my friends. This week, the lack of signals is almost entirely due to rising volatility across the board. Earlier this week, the CBOE Volatility Index (VIX) hit a new 52-week high.

Our risk-management strategy often takes the VIX into consideration.

Why are we seeing an increase in volatility? Because there’s a war breaking out between Ukraine and Russia. And a lot of speculation of how the war will affect the global economy and whether the United States or other countries will join the fight. We also have rising oil prices, high inflation, and a Federal Reserve that plans to announce an interest rate hike in the coming weeks.

In other words, there’s a lot of fear and uncertainty in the market. Hence, rising volatility.

How Rising Volatility Affects Put Options… And Our Trading Strategy

Now, if you’re new around here, you may be wondering why rising volatility works against our put-selling strategy. As most experienced options traders will tell you, high levels of volatility go hand in hand with higher options premiums. So wouldn’t we want to trade at a time like this?

The answer: Kind of!

It’s true that higher volatility results in higher options premiums, which is part of what we try to capture each week with our strategy. However, high volatility also indicates fear, and as fear rises, stock prices tend to fall. This can result in an excessive amount of risk, which goes against our risk-management strategy.

The ideal scenario would be selling options at the exact moment when volatility has topped — premiums are at their highest and stocks have already bottomed — but that is unfortunately impossible to see in real time.

But I believe my Income Trader Volatility (ITV) indicator comes close to achieving that ideal.

The first piece of the indicator is ITV, which measures volatility in individual stocks the same way VIX measures volatility in the broader market.

The second piece of the indicator is a moving average (MA) I apply to ITV. The purpose of the moving average is to help us find stocks where volatility has recently topped out but is now in the process of falling back toward its normal level. In other words, it lets us get as close to that ideal volatility top as we can without sacrificing safety.

Selling an option at that time should benefit from the falling yet still elevated volatility (less risk + higher-than-normal premium).

ITV + Risk-Management Strategy: How We Safely Trade Put Options

ITV works in bull or bear markets. It is my primary analytical tool, and that means that, while I do analyze the direction of the market trend and how the news is affecting stocks, I pay more attention to ITV trading signals.

And right now, there are very few ITV trading signals. Volatility is increasing for a number of stocks, which means there’s only a short list of names where ITV is below its moving average. Of those names, none meet both my additional safety criteria and minimum annualized return.

I don’t expect to have too many weeks where we don’t have any new trades to add to the portfolio, but it’s always a possibility. As usual, I will be searching, but I will not compromise on safety.

If you’re looking for a new way to enhance the way you trade, then I would recommend the strategy we use in my premium newsletter, Income Trader.

In short, my subscribers and I use a conservative put-selling strategy to generate extra income in the market. We’re averaging a 90% win rate on our trades — a level of success I’d challenge you to find with any other market strategy. And our risk-management approach has a lot to do with that success.

I understand not everyone may be comfortable with options, but you shouldn’t let that get in the way. That’s also why I recently released a special report that will tell you everything you need to know, including how my readers are making about hundreds of dollars a week with this strategy. Simply follow this link to check it out.