We are seeing wild volatility and a lot of looming bad news for the market. The upside is that it has never been easier to leverage high volatility in a declining market. Although the bear trading strategy guide may have been a bit dusty, the tried and true methods seem to be working.
Inverse Index ETFS
The other day we reminded you of a great set of tools that thrive in a falling market. They are easy to trade, can be traded in your IRA, and offer a variety of ways to use them. In case you are new to using the index ETFs that go up when the market goes down , we have you covered. We put together a guide that lays it out. (check it out here) . They are simple to trade and have been crushing it for the last two months. In just the first month after the start of the COVID crash, SDOW, the ETF that inversely tracks the DOW (SDOW goes up when the DOW goes down) more than doubled. In addition, inverse ETFs have been fertile ground for lucrative options trades.
Using Options To Grab Gains From The Drop
Another way to pull income from a market that is declining is to buy put options. This is a great way to dramatically boost the power of your investment capital and lock in an amount of risk that you are comfortable with. In addition, this allow you to use the higher volatility that is a common characteristic of dropping markets to boost the potential option profit. The VIX, an indicator that tracks volatility, is heading back towards recent highs and isn’t showing any signs of calming down.
With the right time frame, increased volatility can help give options a greater chance of being profitable. Wendy Kirkland has been pointing out some nice put options on the QQQ. You can see her latest here.
Exploiting the Shift To Safe Havens
The tendency of investors and traders is to move their capital to “safer” investments. Historically, when the market is dropping and there is unrest and conflict, many move their money to gold. As with many market “rules of thumb” it can become a self fulfilling prophecy. The fact that this is so widely believed means many will follow this adage and it will move gold prices up. A great way to leverage this is to use GLD, the ETF that tracks gold related stocks. We just shared more on that in an article you can read here.
Trading the Market Outliers
Even in a down market some stocks will go up. When you can find the ones that are being catapulted by a downtrend they can be extremely lucrative. I was surprised to see an outlier that I wouldn’t have expected. Our readers got a heads up early on a sector that is showing explosive potential in spite of the chaos in a great article from Keith Harwood’. You can see it here.
Remember when things are volatile, you need to adjust your strategies and be extremely mindful of your position sized. Smaller positions is very targeted trades can be more effective in wild, dropping markets. And don’t get discouraged with smaller gains. When the market has dropped 10%, a 5% gain is really more like 15%.
Keep learning and trade wisely,
John Boyer
Editor
Market Wealth Daily
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