SHOCK TREATMENT:
A LEVEL HEAD CAN HELP ACTIVE TRADERS WEATHER GEOPOLITICAL TURMOIL
PETER KENTER POSTMEDIA CONTENT WORKS
From critical elections to social upheavals and international conflicts, geopolitical shocks can drive the market needle in any direction. While these events can activate emotions, keeping a level head and a watchful eye on where the markets are actually going can help active traders maximize the value of their portfolios.
The highly publicized Brexit referendum vote that heralded the divorce of the United Kingdom from the European Union is the poster child for classic geopolitical upheaval.
“It was a shock that offers both political and economic consequences, and a great example of the way in which an event can create volatility around global markets,” says Anton Tanev, senior manager, active trader segment, TD Direct Investing. “In the final week leading up to the referendum vote, we saw prices in certain areas of the market fluctuating wildly in both directions. Active traders thrive in such volatile environments. They monetize on the increased amounts of volatility by building strategies using equity options that allow them to profit regardless of the outcome of the referendum.”
Geopolitical events often present unique characteristics. In each case, active traders should determine their level of exposure or risk to the shock event. For example, an unexpected announcement of a rise in central bank interest rates will likely impact bank stocks and currencies, says Tanev. Traders should consider their concentration in these securities, whether the event impacts their overall portfolio, and whether it represents an opportunity to trade.
“Traders don’t have to do all of their research alone,” says Tanev. “For example, TD’s platform for active traders, Advanced Dashboard, places a great deal of power at their fingertips, including real-time streaming of Canadian and U.S. market data, price target and probability analytics, and advanced insights into single and multi-leg option strategies.
This allows them to remain fully engaged with their investments and effectively validate their trading hypotheses.”
Traders can use the equity and options screeners in Advanced Dashboard to uncover new trading opportunities and validate the likelihood of achieving their price targets by leveraging the probability analytics tool.
Advanced Dashboard also offers insightful analytics that allow traders to closely examine implied volatility (IV), compare it to historical volatility (HV), chart the two trends using the IV/HV graph and determine the magnitude of the expected future fluctuation in price.
“IV and HV are two concepts that are at the heart of an active trader’s decision-making process when they trade on volatility,” says Tanev.
In examining the current value for implied volatility and its position relative to its 52-week range — for example, is it relatively high or low — or relative to historical volatility, active traders gain a competitive edge in evaluating the market’s expectation for future volatility, and this allows them to better position their trades based on these findings.
Faced with a geopolitical shock, active traders should ask themselves if the event is likely to have a short-term or a lasting impact, says Tanev.
“If it’s expected to be shortterm, you can think about putting on small, speculative positions that take advantage of the event to accelerate returns,” he says.
If traders hold positions where a longer-term impact is felt, they can consider measures to effectively reduce their exposure — putting on a hedge position, obtaining premium through options selling, or reducing their size.
“With our new conditional orders — one-cancels-other, onetriggers-another, first-triggersone-cancels-other — we enable active traders to determine their entry and exit strategies up front, helping them lock in their gains, limit their losses and automatically execute their trading plans,” says Tanev.
“Shocks happen, and market fluctuations are inevitable,” says Tanev. “By leveraging the tools available to sophisticated traders, you can remain engaged and take advantage of the opportunities that each event might bring.”
Shocks happen. By leveraging the tools available to sophisticated traders, you can remain engaged and take advantage of the opportunities that each event might bring.