Option Trading and the Global Macro Trader
One of the best things about being a global macro trader is that of being able to profit when things go crazy. Put another way global macro traders live for events that are covered in risk. If there is no risk then there is likely no reward. Of course blindly taking risks is a road to guaranteed ruin.
One of the first and most important risk management tools available to the macro trader is the practice of positions sizing. Position sizing is when you determine an optimal amount to risk on a trade. Obviously several factors can go into your position sizing algorithm. You can look at the probability of the trade working out. You can look at the over all risk versus reward ratio. And you can look at how much of your portfolio you want to risk. Obviously there are hundreds of potential variables that you can input into your position sizing model.
Now that you have the right position size you can start to figure out how to best maximize your trade results. Some securities can give you a greater bang for the buck while lowering your over all risk profile. Others of course make your position far riskier then you first thought it was.
One of the easiest ways to cut off tail risk is by building your position using options. When you are a net buyer of volatility, which is to say that you are long options whether they be calls or puts, you are only risking the amount that you have put into the trade. For instance if the option position costs you one thousand dollars then you can not lose more then that.
Options are great to cut of the tail risk because your downside is totally limited while your upside is unlimited or limited depending upon what your trade is doing. Essentially they have a very asymmetric payoff skew and this can help your trading results.
As with any trading strategy however there is still some risks that you must be aware of. Two of the most common are one that you may be overpaying for the options. Just like when you buy a stock you don't want to pay too much.
The second major risk is that options expire and therefore you need to fully understand your time horizon before getting into a trade. If your plan is to hold the position for years and years then options may not be the best way to go. If on the other hand you are looking at holding the position anywhere from a few days to a year or so then options are definitely worth looking at.
So when trading make sure to evaluate all of your options and you will have much smoother returns with a lot less downside volatility. After all are you trading to have fun or to make money? - 23222
One of the first and most important risk management tools available to the macro trader is the practice of positions sizing. Position sizing is when you determine an optimal amount to risk on a trade. Obviously several factors can go into your position sizing algorithm. You can look at the probability of the trade working out. You can look at the over all risk versus reward ratio. And you can look at how much of your portfolio you want to risk. Obviously there are hundreds of potential variables that you can input into your position sizing model.
Now that you have the right position size you can start to figure out how to best maximize your trade results. Some securities can give you a greater bang for the buck while lowering your over all risk profile. Others of course make your position far riskier then you first thought it was.
One of the easiest ways to cut off tail risk is by building your position using options. When you are a net buyer of volatility, which is to say that you are long options whether they be calls or puts, you are only risking the amount that you have put into the trade. For instance if the option position costs you one thousand dollars then you can not lose more then that.
Options are great to cut of the tail risk because your downside is totally limited while your upside is unlimited or limited depending upon what your trade is doing. Essentially they have a very asymmetric payoff skew and this can help your trading results.
As with any trading strategy however there is still some risks that you must be aware of. Two of the most common are one that you may be overpaying for the options. Just like when you buy a stock you don't want to pay too much.
The second major risk is that options expire and therefore you need to fully understand your time horizon before getting into a trade. If your plan is to hold the position for years and years then options may not be the best way to go. If on the other hand you are looking at holding the position anywhere from a few days to a year or so then options are definitely worth looking at.
So when trading make sure to evaluate all of your options and you will have much smoother returns with a lot less downside volatility. After all are you trading to have fun or to make money? - 23222
About the Author:
If you need actionable trading ideas then check out The Macro Trader It is a weekly global macro investing advisory publication with frequent intra-week updates for time-critical analysis and actionable trading ideas.
posted by X - Men @ 1:26 AM
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