Magazine article Modern Trader

Limit Up! Now What?

Magazine article Modern Trader

Limit Up! Now What?

Article excerpt

TRADING TECHNIQUES

When the market goes wild, there must be a trading opportunity, but getting into a profitable position can be a real challenge. Here are a couple of option strategies to capitalize on volatile conditions while keeping your risk under control.

Two strategies offer an immediate mathematical edge to improve the odds of success in such markets significantly. They provide an alternative to making an outright directional decision and can make money in flat, up or down scenarios with a wide margin of error.

Playing for a downside reversal or chasing a rally both entail directional risk, especially in volatile markets.

The wheat market gapped up on the open on Oct. 15, 2002, and didn't look back as it closed up the daily 30 limit. Futures traders who were not in wheat realized that there must be some kind of great opportunity when such an explosive move occurs, but how do you trade the potentially big gain while minimizing the corresponding risk?

However, volatility discrepancies can offer a theoretical edge at the outset of a trade that does not depend on direction to the same degree as an outright long or short futures position. The key to success relates more to projecting general price ranges than picking direction with perfect timing. If you can pick direction with perfect timing, these two strategies are not for you. If you are like the rest of us mortals who need more of a margin of error, read on.

The numbers used are not theoretical or cherry-picked from the distant past. …

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