For me, there's 2 good things about a market correction, and if you follow our forecasting daily, you know that we've made a market "down" call recently using market and equity level indicators available on Chaikin Analytics.
First good thing: I make my best "fast money" to the downside during intermediate market tops. And I don't need the securities I trade to actually make down moves to profit. Second good thing: people panic when the market gets more volatile, and some make really dumb decisions that give me the chance to make really good money. And I'm not talking about value investing. Nor stock trading for that matter.
Sure, Panickers on the Streets of Wall throw uber-bullish Power Gauge rated stocks out of their portfolio causing prices to plummet for no logical reason, leaving me to cherry pick them at an insane discount. It's like booking Viking River Luxury Cruises at Carnival Prices (which I also do at the beginning of a new recession) But that comes later. I don't trade bullishly in bearish market conditions. When I buy, I want prices to go up...and not next year...next month. So searching for value happens after the panickers need to ice their overused, swollen sell button pinkies.
My favorite strategy at the beginning of a down market is to SELL options. When people panic, that causes volatility to increase, and higher volatility means higher options prices. And selling inflated options to people willing to buy them at any price sets me up for returns on risk that are far superior to the risk itself. I could write a book on options selling , but fortunately others have. Learn it. Because with a large enough sample size, taking the other side of inflated option trades makes you like the casino. And I'm not even factoring in the edge in directional bias you get from Chaikin Analytics. And that's huge (and covered extensively elsewhere on this site)
Not only can option selling face consistently higher probability outcomes, but also realize higher returns than you deserve to have based on return on riks. And option buyers will give you this edge over and over. The key is to wait for option prices to become inflated. Selling options in low volatility environments actually puts you in a low probability outcome position.
Yesterday is an example of why I especially like down markets for trading (noone likes them when long term investing, but we don't panic), The market ran up on hope then predictably stalled near resistance and fell back today. My trade choice was a little "deep end of the pool" in terms of risk since it involved selling a "naked call", but a similar risk-defined version of the trade could have been easily taken. Rather than getting into the specific of the trading mechanics, let's stick to the way the odds were in my favor. But I'll say it again, naked option selling is extremely risky when you don't know what you are doing. You can be wiped out.
The trade I entered was Marc Chaikin's Bearish Stock of the Week:
SOLD -3 DWRE 100 AUG 14 65 CALL @1.10
The bottom line: I sold 3 call options to another trader, giving him the right to buy the stock from me at $65 a week from Friday. I received $110 for each of 3 short option contracts as consideration since I was giving up control of my stock. (Oh yeah, it was stock I didn't own. That's why it's called a "naked" trade and why this one carries extreme risk)
If the stock price stayed below $65 (it was trading at about $61 at the time) when the option was set to expire week from Friday, I'd keep the money I was given by the speculator who bought the call I sold to him. In fact, because I received an advance fee from the option buyer for control of my stock, the price of DWRE would have to close above $65 + $1.10 or $66.10 before i'd begin to lose money. The premium increased my breakeven price. A big move like that it is possible on the heels of an earnings announcement. But I'm an experienced naked option trade who is fanatical about controlling risk. And when I looked at all the factors putting the wind and my back, it really was a no-brainer.
- The stock was trading at around $60 with less than two weeks to go to expiration. The theoretical odds of losing a penny or more by having the stock pop above 65 at expiration was 30%. The odds were 70% in my favor. There is an indicator called "Delta" on very option table that gives me the approximate probability of the stock closing "in the money" by expiration.
- Options close to expiration decay in extrinsic value closer to execution. Out of the money call options in particular tend to lose their value faster as one nears expiration.
- I entered the trade a day before the company's earnings announcement, and front month implied volatility was insanely high compared other months that fall after earnings. This meant that there was a lot of short term fear that would be gone once earnings came out. I wouldn't have to incur the risk of holding the contracts closer to expiration to make my returns.
- The company makes no money and had a bearish Power Gauge ratings. Fundamental risk to the downside.
- The stock was in a long term downtrend, but had made a run up to near the the long term Chakin Trend Line resistance into earnings. A classic set up for a bearish move, especially in uncertain market conditions. I call these "bathwater" stockers. That always gets thrown out.
- The market was rebounding after a big down day. Call prices surged. More overpriced junk to sell a speculator.
- The option market expected a price move once the earnings announcement came out of only $4-$5, well within my tolerance for pain. So even if the stock spiked on an earnings surprise, the most probable worst case was a break even to slight losing trade.
- With the market and equity level indicators and analysis found on Chaikin Analytics, I'm able to trade with more conviction to the downside, just as I trade Very Bullish stocks with conviction during up markets. But I needed the stock to stay below 65 in a down market, so Bearish ratings, weak technicals, insider selling, steep valuations, weak industries are my friends.
Chaikin Analytics tool that has taken my high probability trading from a 65% win rate to close to 80%. And because I trade with more conviction on directional bets, I make more per trade when I win because I sell premium closer to the money. Normally, that would lower my probability of success. There's always a trade off between risk and reward and the math between buyers and sellers tends to even out over time. Every winning system must have an edge. And no system works in all market conditions. But for the one we're in now, call spreads and "naked" calls are my favorite trading strategy and my edge is always the same. Chaikin Analytics.
And these brilliant trading analysts aren't stupid. If you keep up with his weekly analysis, which is part of what you get when you subscribe, he's been concerned about a protracted downturn for months. And people who sell tools to retail investors know that the time to hawk their wares when the market is bullish and pundits are yelling "Buy Buy Buy". We could be headed for a soft patch, and the discounts to more educated retail investors like us have started to roll in. We're the ones who can make the annual subscription on a few well placed earning trades.
So click here and grab a discount on the monthly fee or annual subscription. It's a good one.