Option Trading, Risk Management, 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.
Position sizing is one of the first tools that a global macro trader, or any trader for that matter should be concerned with. Position sizing allows you to know how much you are risking at the position and portfolio level. There is or at least can be a lot that goes into your position sizing algorithm. Some of the important factors are the amount of your portfolio you are willing to risk. The distance from your entry to your stop. And the probability of the trade working out. You can put in hundreds of other factors but these are a good starting point.
Once you have determined the right position size, or amount to risk on a given trade it is now time to look at how you can structure the trade to maximize your risk to reward and to cut off tail risk. What is tail risk? Tail risk is a term used to describe risks that fall outside of a normal distributed curve. Essentially a tail risk is something like a bomb going off in a major city or the CEO of a company getting arrested for fraud. Anything that can absolutely destroy a position is considered a tail risk.
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 very useful to cut off tail risk because they totally limit your risk while allowing for plenty of upside. In fact sometimes they provide a lot more bang for the buck then an outright stock position as they can have a lot of inherent leverage.
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 other major risk is that your time horizon does not fit the trade. If you want to hold the position for years then move on and probably pass on using options. However if you want to hold it for weeks to months then go in and check them out as you can do a lot of risk reduction using options.
Ensure that in your trading you are doing everything possible to maximize your risk to reward ratio by paying the majority of the attention the risk management segment of trading. Are you trading for fun or praise, or are you trying to make money? - 23223
Position sizing is one of the first tools that a global macro trader, or any trader for that matter should be concerned with. Position sizing allows you to know how much you are risking at the position and portfolio level. There is or at least can be a lot that goes into your position sizing algorithm. Some of the important factors are the amount of your portfolio you are willing to risk. The distance from your entry to your stop. And the probability of the trade working out. You can put in hundreds of other factors but these are a good starting point.
Once you have determined the right position size, or amount to risk on a given trade it is now time to look at how you can structure the trade to maximize your risk to reward and to cut off tail risk. What is tail risk? Tail risk is a term used to describe risks that fall outside of a normal distributed curve. Essentially a tail risk is something like a bomb going off in a major city or the CEO of a company getting arrested for fraud. Anything that can absolutely destroy a position is considered a tail risk.
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 very useful to cut off tail risk because they totally limit your risk while allowing for plenty of upside. In fact sometimes they provide a lot more bang for the buck then an outright stock position as they can have a lot of inherent leverage.
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 other major risk is that your time horizon does not fit the trade. If you want to hold the position for years then move on and probably pass on using options. However if you want to hold it for weeks to months then go in and check them out as you can do a lot of risk reduction using options.
Ensure that in your trading you are doing everything possible to maximize your risk to reward ratio by paying the majority of the attention the risk management segment of trading. Are you trading for fun or praise, or are you trying to make money? - 23223
About the Author:
If you need actionable trading ideas then check out The Macro Trader Itis a weekly global macro trading advisory publication with frequent intra-week updates for time-critical analysis and actionable trading ideas.
posted by X - Men @ 3:06 AM
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