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Posted November 18, 2008 (12:16PM)
Lots of folks are looking for a bottom, calling a bottom here, there.
All kinds of opinions on "triple bottoms", "testing the lows", blah,
blah, blah.
Truth is, nobody really knows where the bottom is (If you do, let me
know and we can get rich together). But we do know a couple of things:
1) Volatility is still huge. VIX closed today at 67.54, even with the
late rally. Intraday swings of 2-3% and more are still happening.
2) The news is bad, bad, bad. Yes, the market will turn around before
the news does, but it seems like there are more shoes to drop.
3) A bear market often has big rallies. We saw one last Thursday, and a
daily intraday rally every day since. So far, none of the rallies have
held for long.
One school of thought says, "Hey, we're down 40%+ from the highs of
last year. Surely we're at the bottom by now. It's crazy to be short
now" Well, maybe. But I think there's still lots of downside potential.
I've tried some long positions lately and I've lost on just about every
one. Only short positions are making me any money right now.
If you're a long-term investor, you want to buy at the bottom and ride
the recovery up. But if you're an option trader, I suggest you consider
reversing the strategy: while the market is searching for a bottom, go
short (buy puts) after every rally. You make money on the (so far)
inevitable correction. I've been doing this with some minor success for
a few weeks now, and I'm trying to fine tune my approach. But even with
a non-sophisticated approach I've had more winners than losers.
Because of all the churn in the market, you stand a good chance of
getting a correction fairly quickly, so the option value decay doesn't
work against you. I'd like to have at least 3 weeks before expiration,
so I'm trading Dec. puts now. I'd like to hold just a few days. If the market moves my way significantly, I set a trailing stop and wait to be stopped out at the next rally.
ETF's are great for this. They give you broad-based exposure to the
market (or a sector) and have generally excellent liquidity. I've been
trading SPY puts, but you could look at QQQQ, IWM, DIA, or the SPDR
sectors like XLE or XLF.
Warning: At some point, conditions will change and this won't work any
more. And there probably won't be any notice (no magic bell rings at
the bottom). If volatility comes way down, any contracts I'm holding
will erode and it will take longer for the correction to come, which
means time decay starts hurting me. If the bottom is in, the correction
will never come, and I'll lose. I'm just sharing what I'm doing.
I'd like to hear how you all are trading this crazy market...
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