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Positioning into events with defined risk

Lesson 18 · about 11 min

If you decide to hold a position through an event, the question becomes how to make sure the event cannot do more damage than you have accepted. This lesson gives you the arithmetic, and the tools that turn an unbounded risk into a bounded one.

The problem with a stop

A stop-loss is a promise you make to yourself that the broker executes as a market order when price trades at a level. Through a data release, price can jump over the level. Your stop fills at the next available price, and the difference is slippage. On an ordinary day slippage is a tick or two; on CPI day it can be several points in ES, several pips in FX, or several dollars in gold.

So the first step is to stop treating the stop distance as the risk. Through an event, the risk is:

risk per unit = stop distance + expected event slippage

and the expected event slippage is something you estimate from your own log (Module 5, lesson 2) or, when you have no log, from the typical first-move size in Module 3's table.

Sizing for the event

Worked example. Account $50,000, risk per trade 1% ($500), instrument MES (Micro E-mini S&P, $5 per point).

Scenario Stop distance Expected slippage Effective risk per contract Contracts for $500
Normal day 10 points 0.5 points 10.5 × $5 = $52.50 9
Hold through NFP 10 points 10 points 20 × $5 = $100 5
Hold through CPI in an inflation regime 10 points 25 points 35 × $5 = $175 2
Hold through FOMC with SEP 10 points 30 points 40 × $5 = $200 2

The stop stayed at 10 points. The size fell by three-quarters. This is the correct response to an event: not a wider stop with the same size, which increases risk, but the same or wider stop with smaller size, which keeps risk constant.

Alternatively, widen the stop to sit outside the plausible event range, then size to that. A 40-point stop on MES at $5 per point is $200 per contract; two contracts risk $400. The choice between a tight stop with slippage risk and a wide stop with no slippage risk is a choice between being taken out by noise and being taken out by a real move. Through an event, the wide stop is usually the more honest one, because the tight one will not hold anyway.

Key idea: Through an event, risk per unit is stop distance plus expected slippage. Keep dollar risk constant by cutting size, not by pretending the stop will hold.

Defined-risk structures

Some instruments bound the loss by construction.

Structure How it bounds risk Cost Suits
Long options (a put to protect a long, or a call to protect a short) Loss beyond the strike is capped Premium, which rises sharply into events as implied volatility increases Swing positions you want to keep through FOMC or CPI
Long straddle or strangle (no directional view) Loss capped at premium paid Premium; the position needs a move larger than the implied move to profit Traders who expect a bigger move than the market prices; usually a losing trade on average because events are well priced
Vertical spread Both max loss and max gain defined Premium net of the sold leg Directional views with a budget
Smaller notional in a futures micro contract Reduces dollar risk per point None beyond commissions Everyone
Half-size with a re-add rule Cuts exposure through the event, restores it after Missed gain if the event goes your way Correlated swing positions

Two warnings about options into events. First, implied volatility rises into a scheduled release and collapses after it ("vol crush"); buying options the day before FOMC and holding through is paying the highest price for insurance and watching it deflate the moment the uncertainty resolves, even if the price moved. Second, the implied move (roughly the straddle price as a percentage of the underlying) is the market's estimate of the event's size, and on average it is about right. Betting that the move will be bigger than implied is a bet against a well-calibrated crowd.

Prop-firm and daily-loss constraints

If you trade a funded account with a daily loss limit, the event slippage calculation is not optional. A single CPI print with two contracts of ES and 20 points of slippage is $2,000, which is the entire daily limit on many $50,000 evaluations. The rule for funded accounts is simpler: be flat through tier-one events unless your position is well in profit and your stop is at or beyond breakeven. The prop-firm course covers the account rules in detail.

Correlated exposure

Three positions that all lose if the Fed is hawkish (long NQ, long gold, short dollar) are one position through FOMC. Add up the event risk across all of them, using the slippage-adjusted numbers, and compare to your maximum open risk. The risk-management course's portfolio heat lesson applies with one modification: through an event, use the event slippage numbers, not the normal ones.

Try it: Take your current or most recent swing position. Compute the effective risk per unit for a normal day and for the next tier-one event on the calendar, using your own slippage estimate. Write down the size you would need to keep the dollar risk constant. If the answer is "less than one contract," the position should be flat through the event.

Recap

  • Through an event, risk per unit = stop distance + expected slippage; the stop alone understates it.
  • Keep dollar risk constant by cutting size, or by widening the stop to sit outside the event range and sizing to that.
  • Options bound the loss but cost most right before events and lose value to vol crush after; the implied move is usually well calibrated.
  • Funded accounts with daily loss limits should be flat through tier-one events unless the position has cushion.
  • Correlated positions are one position through an event; total the slippage-adjusted risk.

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Slippage on a market orderA buy order clears four price levels, so the average price paid is worse than the price first quoted.Buy 1,000 shares at marketpricesell orders resting (bar length = size)20.04300 shares20.03200 shares20.01200 shares20.00300 sharesnothing resting at 20.02order sweeps up the bookaverage fill 20.02SLIPPAGE0.02 a share$20.00 in totalintended 20.00Each level fills at its own price; the average is what you really paid.
Slippage on a market order. You click at 20.00, but only 300 shares are resting there, so the rest of the order fills at 20.01, 20.03 and 20.04. The average price paid is 20.02, and that two-cent gap is slippage.
Payoff of a long straddle at expiryA V shape with its point at the strike and both arms rising through zero as the price moves away.Profit / loss per share08090110120Profit if the move is big enough, in either directionStrike 100Breakeven 92Breakeven 108Max loss 8 — both premiums, if it finishes at 100Underlying price at expiry
Long straddle: payoff at expiry. A 100 call and a 100 put bought together for 8 make a V. A quiet market that ends near 100 costs the whole 8; the position only turns positive once the price finishes below 92 or above 108, whichever way it goes.
How a position size is worked outAccount size, risk per trade and stop distance feed into one box giving the number of shares.ACCOUNT SIZE$25,000your capitalRISK PER TRADE1%of the accountSTOP DISTANCE$0.50entry to stopPOSITION SIZE500 sharesrisk budget: $25,000 × 1% = $250position size: $250 ÷ $0.50 = 500 shares
Working out a position size. Three numbers decide how big a trade is: the account, the share of it put at risk, and the distance from entry to stop. One percent of $25,000 is a $250 budget, and a $0.50 stop divides into that 500 times.