Stop-Loss in a 40 Vol Market

When setting up a long position with a stop-loss and a target profit level, the trader is basically long volatility above the entry price and short volatility below it (short convexity and skew). In a market drifting down and moving at 40 vol, this strategy has no chance. It is short vol at the wrong spot.  Instead of using stop-losses to reduce risk, we hedge our positions using spreads.  Everything is relative to something else, and we take risks only when we can exploit a liquidity gap.

Anyone having a good experience with stop-loss strategies in this environment?

Written by Michael Bigger. Follow me on Twitter and StockTwits.

Comments

[sentimentArb]

Also similar to being long a down-and-out barrier option. I guess an issue with trading spreads is that liquidity gaps continue to widen as markets are crashing, with mean reversion occurring only when markets return to normal.

[A.Augustus]

A Trader can not always be right and as we know timing is of the essence in this business. To me, this seems as a great way to extend ones time frame and truly allow the trade to develop. By being flexible instead of rigid you create opportunity. You can leg out, sell options to hedge it, etc. etc. I guess all I'm saying is "You adapt, evolve, compete or die" - Paul Tudor Jones

Great post...