The term “trading mechanically" is often referenced and discussed on the tastytrade financial network.
While there may be a wide range of interpretations and applications for this concept in the trading universe, tastytrade recently identified some of the most important aspects of trading mechanically, and highlighted them on a recent episode of Tasty Bites.
Generally speaking, "mechanical trading" refers to a methodical approach to portfolio management. This is particularly important when trading volatility, because this strategy relies heavily on statistics and probabilities.
In that sense, volatility traders try to remove emotion from portfolio management and instead rely upon disciplined decision-making that optimizes favorable probabilities.
As most tastytraders already know, the VIX measures the stock market's perception of risk, which is implied by option prices in the S&P 500 index. In layman's terms, when fear of a market selloff intensifies, option prices increase, causing the VIX to rise. Alternatively, when complacency takes over, and fear subsides, these options lose value, causing the VIX to decline.
Volatility traders filter global financial markets seeking to purchase option premium when they think expectations for ongoing market volatility are too low - or for opportunities to sell premium when they think expectations for ongoing market volatility are too high.
The reason a "mechanical" approach is so critical to volatility traders is because opportunities in this niche of the markets don't revalue instantly. That means traders are required to monitor and manage numerous positions in their portfolios with the intention of producing the maximum possible return, while also minimizing risk.
So-called “trade management targets” are one aspect of trading mechanically, and can help traders apply a systematic methodology to closing positions when certain P/L targets are achieved. However, there are additional methodologies and parameters that traders can use (or keep in mind) when striving to trade “mechanically.”
On the aforementioned episode of Tasty Bites, the hosts walk tastytraders through some of the finer points of trading mechanically, including:
Number of occurrences (high volume trading)
Trade entry (delta neutral trading)
Trade management targets (systematically closing positions)
If you are looking to build on your mastery of mechanical trading, we hope you’ll take the time to review the complete episode of Tasty Bites when your schedule allows!
Additionally, an episode from tastytrade’s Skinny on Options series also focuses on mechanical versus emotional trading, and we recommend reviewing that as well.
If you have any questions about trading mechanically, don’t hesitate to leave a message in the space below, or reach out directly at firstname.lastname@example.org.
We look forward to hearing from you!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.