The markets fell hard yesterday (Thursday), in the biggest one-day drop so far this year.
Traders kept their fingers on the sell button pretty much all day. The Dow Jones Industrial Average tumbled 335 points, the much broader S&P 500 Index got shellacked 41 points, and the tech-laden Nasdaq lost 90 points.
Yet this is NOT a "run for the hills" moment.
Instead, it's a fantastic short-term trading opportunity.
Reversals usually are. They result in a fundamental change in the pricing assumptions that otherwise propel prices higher. Most of the time they're the result of changes in some fundamental catalyst like interest rates, Fed notes, or, in this case, the IMF's report that global growth will only hit 3.3% this year.
So what do you do?
There are a lot of ways you can profit when the markets change direction. In fact, the menu of choices makes ordering designer coffee seem positively simple. There are shorts, leveraged inverse funds, spreads, derivatives, and futures contracts with all kinds of exotic names (though most are simply ways to separate you from your money).
If you want simple protection that you can "set and forget" as an investor, consider buying a fund such as the Rydex Inverse S&P 500 Strategy Fund (MUTF: RYURX). It's an inverse fund that tracks the S&P 500 and rises 1% for every 1% the index falls. Studies suggest that having 2% to 5% in a choice like it can not only dampen overall portfolio volatility, but hedge the income stream and principal value of your investments at the same time.
It's so effective that I advocate keeping a permanent allocation to inverse funds for just these kinds of market conditions. That way you're never caught by surprise.
But if your goal is quick profits, get ready to make this trade instead…
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About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.
Keith, your article on options was very well done, and I appreciate the info. However, I may be more confused now than before I read it! I think that my confusion arises from the fact ( ? ) that it seems to have been written from the perspective of someone who already OWNS the underlying. I find this to be confusing, (because I'm trying to "put myself" on the other side of the trade ) because I am looking for strategies to ENTER certain positions, like gold, or "regular" stocks, using leverage and only exercising the option into a position on the underlying when it is already ITM, or bought at a discount. Could you please give me / your readers viable strategies for using options to ENTER a given position with the benefits /leverage / etc… that options can provide ? I would like to read your thoughts from that perspective !!!!