The management of one’s personal finances is a year-round job, and the same can be said for the management of personal investments/trades—especially for active market participants.
But most people take a vacation or two during the year, leaving periods during the year when one’s portfolio goes unsupervised.
For some investors and traders, it is prudent to prepare the portfolio for an upcoming vacation, or another important life event—whether it be of the expected or unexpected variety (i.e. wedding, honeymoon, funeral, etc…).
It’s all about risk management. And one’s approach to managing risk during a time away will depend heavily on their unique market outlook, strategic approach and risk profile.
But there are some common themes that all investors and traders can consider when they aren’t able to monitor their portfolios as closely as they might like to, including:
- Time of year
- Expiring positions
- Time horizon
- Portfolio volatility
Time of Year
When it comes to the calendar, there are several reasons that an investor or trader might be more comfortable going on vacation during a certain month, as compared to another.
One of the most important factors to consider when it comes to the calendar relates to the tax year. For most individuals, the tax year ends on December 31. That means any strategic decisions that involve the current tax year need to be resolved prior to year-end.
For many, these decisions typically involve managing winners and losers. For example, one might decide to close a losing position during a specific period to help offset taxable gains in another position. This strategic approach is often couched as “tax selling.”
Tax selling refers to the act of intentionally selling an investment with an associated capital loss in order to lower (or eliminate) the capital gain realized through another investment (or multiple investments).
If an investor or trader is planning a vacation in December, it is prudent to review one’s capital gains and losses (realized and/or unrealized) to ensure that any tax-related management is executed prior to the vacation, or to ensure that a plan has been put in place to execute one’s strategic desires prior to year-end.
Secondly, the time of year can also be important because some months on the calendar are historically more volatile than others. For this reason, it’s possible that an investor or trader might decide to strategically adjust his/her portfolio to reduce risk exposures when taking a vacation (or dealing with an unexpected life event) during the most volatile months of the year.
Previous research has established that September and October tend to be the most volatile months of the year (on average). On the other end of the spectrum, the months of May, June and December tend to be the least volatile, as illustrated below.
Considering the above data, some market participants prefer to vacation during certain months of the year, as compared to others.
Regardless, the most important consideration is that every market participant consciously ensures that all portfolio exposures (i.e. open positions) have been analyzed and adjusted as necessary prior to a time of leave.
In the trading and investments industry, the term “expiration” refers to the fact that certain securities exist for a finite period of time.
For example, options, futures, and futures options only exist through their expiration date, after which these contracts are invalid. Traders of these securities need to closely monitor upcoming expirations and manage accordingly.
This is especially important when preparing for time away. It’s imperative that investors and traders identify near-term expiring positions and set forth a management plan.
This is as simple as setting a reminder in one’s calendar. Or it could involve placing a so-called “stop-loss order.” With a stop-loss order, the investor/trader enters an order to exit a trading position when the price of their investment moves to a certain level that represents a specified amount of loss.
The opposite type of order could also be entered by the investor/trader prior to a vacation. These are typically referred to as “take profits orders” (TPO). A stop-loss or take-profits order is deployed using a good-til-canceled (GTC) order—the latter being an order to buy or sell a security that lasts until the order is completed or canceled.
Time horizon is another important consideration for investors and traders that might be going on vacation, or impacted by an unexpected life event.
Like an upcoming expiration, this factor also relates to market timing, but in this case, it involves securities that don’t expire (i.e. stocks and ETFs). For example, most investors and traders enter a stock or ETF position (long or short) with some sort of timeframe in mind.
For example, one might buy Apple (AAPL) stock with the intention of holding it for many years. Alternatively, one might decide to buy a stock or ETF for a shorter period—for a couple of weeks, or a couple of months.
When it comes to short-term positions, these types of exposures need to be evaluated prior to going on vacation. The decision to close a short-term position hinges on several factors, such as an upcoming event, or the current P/L in the position.
Either way, it’s prudent to evaluate these short-term positions prior to going on vacation, or leading up to a time when one isn’t able to monitor the portfolio as closely as they might like.
Similar to expiring positions, it can be prudent to set forth a plan for short-term positions to help ensure they aren’t overlooked. This may involve deploying stop-loss orders and/or take-profit orders.
Depending on one’s unique market approach and risk profile, elevated volatility in the markets may be a welcome development.
However, elevated market volatility is rarely beneficial for investors and traders that are on vacation, or preoccupied with some other aspect of their life. In this type of trading environment, the market tends to fluctuate heavily, which in turn can catalyze high-magnitude moves in specific underlyings—whether they be stocks, options, futures or bonds.
As such, some investors and traders elect to reduce portfolio exposure leading up to a vacation, or amidst an unexpected life event.
As mentioned previously, this wouldn’t likely apply to a long-term position of high conviction. For example, if one owns shares of Microsoft (MSFT), and plans to hold them for many years, this position wouldn’t likely need to be adjusted leading up to a vacation.
On the other hand, an options or futures position—which might experience high-magnitude fluctuations in value during periods of elevated volatility—may need to be adjusted leading up to a period when the trader/investor can’t actively monitor the position.
This may involve closing the position or shrinking the position size. Alternatively, one could also minimize the risk in the position by transforming it from a so-called “undefined-risk” position to a “defined-risk” position.
As a reminder, defined risk trades have clear maximum profit and loss potential, whereas undefined risk trades can theoretically produce unlimited profit and loss. Defined-risk positions offer the benefits listed in the graphic below, which may be attractive to investors/traders that aren’t able to monitor their portfolios during vacations or other unexpected life events.
To learn more about prepping one’s portfolio for a vacation, or another unexpected life event, readers can check out this new episode of Options Trading Concepts Live.
To follow everything moving the markets during the remainder of 2022, monitor TASTYTRADE LIVE, weekdays from 7 a.m. to 4 p.m. CDT.
Sage Anderson is a pseudonym. He’s an experienced trader of equity derivatives and has managed volatility-based portfolios as a former prop trading firm employee. He’s not an employee of Luckbox, tastytrade or any affiliated companies. Readers can direct questions about this blog or other trading-related subjects, to firstname.lastname@example.org.