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Trading in a Volatile Market

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PostPosted: Sun Oct 09, 2005 9:08 am    Post subject: Trading in a Volatile Market Reply with quote

Volatility measures the speed and magnitude of movements in a stock price within a trading range. Consequently, volatile stocks tend to be excellent trading stocks, because typically when a stock is bought too soon, there's enough volatility to at least get your money back, and opportunities to make large gains quickly.

When short-term technical indicators are properly used with volatile stocks, then it's almost a certainty that large gains will be made quickly. However, in a volatile market, there's less time to collect information, make decisions, and act upon them. So, managing time becomes more important in a volatile market.

One way to save time is using buying and selling spreads. For example, when SPX (S&P 500) fell from 1,230 to 1,182 within three days of selling, many of the short-term NYSE and Nasdaq technical indicators became severely oversold on the third day. At that point, I set a (limit) buy order for OEX (S&P 100) Oct 550 calls at 7.30, on the low end between the bid and the ask prices.

I also set buy orders, for equal positions, at 6.90, 6.50, and 6.10. Those orders were soon filled. So, I placed more buy orders, for equal positions, at 5.80, 5.50, and 5.20, and those orders were filled, except at 5.20, because OEX didn't fall enough. I placed sell orders after I bought the first round of positions at 8 and 8.50, in case OEX spiked higher.

With the buy and sell orders in place, I had time to look at other stocks and short-term technical indicators. Also, I had a little time to think about what I was going to do, check market news, and figure out some of the possibilities of what would and could happen to the market and my portfolio. However, there was little time, and I had to think and act fast.

After all my OEX positions were filled, the market rose sharply. So, I reset my sell orders to sell one-third at 6.50, one-third at 7, and one-third at 7.50. I checked the one and five minute charts. The rally looked strong. So, I raised the 6.50 order to 6.80, and the 7 order to 7.30. One-third of my position was filled at 6.80, and half of another one-third position was filled at 7. At this point, I sold half of the OEX calls. So, I reset the order to sell the remaining calls at 8, which were filled.

After the market rallied, half of the OEX position was sold, and the remaining sell orders were reset, I looked at a batch of stocks, I was following, to find if one may have lagged the rally. I wanted to buy another call position (i.e. a longer-term call), if the risk was low enough, since I built-up my cash position, and the market was still low.

The average cost of the OEX calls were 6.35, and they were sold at an average price of about 7.45, within 45 minutes, for over a 17% gain. I sold the first one-third of calls only to lower my average cost, and build-up cash, in case OEX pulled-back. If I had more time to think and act, I would have bought larger positions below 6, because many short-term technical indicators were extremely oversold. Also, after I bought calls at 6.90, there was an opportunity to sell at over 7.50. However, I didn't have time to change the order. For a brief time, managing time becomes more important than managing the portfolio.
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