I have been getting many questions asking, "What do I do now that the market is falling"? That is a great question â one that deserves an answer.
The good news is the market is a little weak. However, people have been so lulled into a slow and advancing market that a small correction has them on pins and needles. It is almost as if they forgot the years 2000-2002, when 500-point moves were common and the NASDAQ lost 80% of its value in 2 years. But that is what makes trading so much fun, so challenging, and sometimes easy (but most of the time hard). People have a short attention span. I have already gotten up to change the channel 3 times in 2 paragraphs.
We need to keep a couple things in mind when looking at the big picture:
So what is the market going to do now? I personally didn't see enough capitulation and fear to determine and feel comfortable with the fact that all the weak bullish traders got frightened out of the market, which is one of the biggest requirements for making a bottom. In addition, many people view yesterday's (April 6th) 150+ run up in the Dow as a "key reversal day." Finally, anyone who sold volatility on a 20% did not sweat for one second and is probably making a lot of money. So what does that tell me?
The sell-off is likely not done. I would like to see one more deep scare with the VIX >20% before I say the bull trend is going to continue. Don't worry about Shanghai. Their market doubled in a year and at one point was up over 170%. That had to slow down and reverse at some point. The one-day sell-off did adjust some attitudes with the overall public's bullish sentiment of 54% bullish going to 36.5% bullish in one day, but a little more of the whiner-ectomy would be nice.
So how does one trade this market? This is a time to sit back and be grateful that you have an options background. Pure market direction traders are going to find the increased volatility more difficult to guess the direction of the trend, if one even exists anymore. But as options traders you have 4 more tools in your tool box. The most powerful tool you have is knowledge. Mr. And Mrs. Joe Average are stuck reading the cover of some magazine written by journalists too poor at trading, so they have to write for a living. They read an article by an English major at Desoto School for the Challenged and Engine Repair and hear the author loves MSFT, so they go out and buy the stock.
Instead, our readers prefer knowledge over tea leaves and recommendations by half-wits who soil the good name of "half-wits." You have 5 toys to play with instead of just one (delta). Let's review the different variables you can play:
I am forbidden by many entities and three-lettered agencies from giving investment advice, so please do not act on what I am about to say, but rather consider this an education exercise. Hypothetically, if the market were to sell off again I would be looking to take advantage of things before, during and after as follows:
I can't stress enough that I am not making any recommendations here whatsoever. This would be, however, a great time to learn new strategies by PAPER trading these ideas (not suggestions).
Staff Writer and Trading Strategist
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