Retaliation in options trading is a form of market manipulation that involves trading at a considerable size and price, intending to create an adverse effect on the other party involved. Traders can use it to gain an advantage in an individual trade or to create a more significant impact by forcing prices up or down in multiple markets. To avoid being caught up in retaliatory trades, traders must keep key strategies in mind.
Monitor market activity
Monitoring market activity carefully is key to avoiding retaliation. Keep track of price movements and any unusual patterns that might suggest market manipulation by another trader – such as rapid buy or sell orders from one source. Quickly acting when you spot questionable activity will help minimise your risk exposure.
Use limit orders
Using a limit order rather than a market order is one way to protect against retaliation. By specifying the price you are willing to pay for an option, you can avoid being taken advantage of by having your order filled only at that price.
Utilise stop-loss orders
Stop-loss orders help traders reduce their risk exposure by setting predetermined points at which they will exit a trade if it moves in an unfavourable direction. It allows traders to lock in profits and minimise losses while avoiding the risks associated with retaliatory trades.
One way to make sure your trades are not targeted with retaliation is to increase their liquidity. Doing so will make them less attractive to traders looking for a quick profit and reduce the chances of your order being filled by an opportunistic trader.
Avoid large trades
Another way to avoid retaliation is to be mindful of the size and timing of your trades. Try to limit yourself to smaller orders spread out over multiple days or weeks, as larger trades may be more attractive targets for retaliatory activity.
Utilise limit-on-close orders
Limit-on-close (LOC) orders allow you to set a maximum price at which your order will be filled when the market closes. It prevents traders from taking advantage of the closing price movements with retaliatory trading and allows you to better control your risk exposure.
Use algorithmic trading
Algorithmic trading is an automated order execution that uses computer algorithms to make trading decisions. It can help traders avoid retaliation by making their orders less visible, reducing their chances of being targeted with retaliatory trades.
Spread out risk
By spreading out your risk over multiple markets and strategies, you can reduce any trade’s impact on your overall portfolio. Doing so will also make it more difficult for another trader to target your positions with retaliatory activity.
Utilise options spreads
Using options spreads – such as a bull call spread or bear put spread – can help reduce your risk exposure while still allowing you to take advantage of price movements in the market.
Monitor option volume
By monitoring option volume, traders can identify unusual or suspicious activity that might indicate retaliatory trading. Paying attention to any sudden changes in volume can help you spot potential retaliation and take steps to protect your position.
Utilise futures contracts
Futures contracts give traders more flexibility when it comes to risk management. They allow them to enter into an agreement with another party at a predetermined price, which can help reduce their exposure to retaliatory trading.
Understand the risks
Traders must understand the risks associated with options trading before entering any position. Understanding how different strategies work and the associated risks will help you make better decisions and avoid the potential for retaliatory activity.
Staying vigilant is key to avoiding retaliation in options trading. Awareness of market movements, news events, and abnormalities can help traders identify suspicious activity before it becomes a problem.
Utilise portfolio diversification
Diversifying your portfolio by investing in multiple markets and strategies can help protect against losses due to retaliatory trading. It also allows you to spread out your risk over different assets, reducing one trade’s impact on your overall performance.
Hedging can provide protection from sudden market changes or against other traders looking to take advantage of your positions. By using hedging strategies, traders can reduce the risk of retaliatory trading while still taking advantage of price movements in the market.