3 Ways to Embrace Market Volatility and Earn More Money
Most investors have a long only strategy across their portfolio. They believe shorting and trading options is for the pros. With all the information available on options and shorting, that’s simply not the case.
Having some portion of your portfolio tied to a short hedged investment (which I’ve written about often) should be a part of any portfolio strategy. Properly hedged positions can make money in an up or down market, and can make money very quickly in a fast falling market.
In addition to trading hedged positions, there are two other simple ways to benefit from a falling market.
- Trade hedged positions
- Follow the current trend in your stocks
- Maintain short positions in your account
1. Trade Hedged Positions
I’ve written extensively on trading a warrant hedge, here, here and here to begin with. One point that I talk about, but don’t overly emphasize, is that you make money faster in a warrant hedge when the stock is caught up in a market correction.
Ideally, you’d like the stock to trade up and down in order to be able to put on and then take off the hedge over and over. But, a fast falling stock, especially one that is falling through the exercise price, can make your short position sing.
And, you don’t even have to sell the warrant. Just hold on to that leg of the trade to put the position back on, or to sell higher, when the stock recovers. Since I’ve written about this so much I’m not going into great detail in this post.
2. Follow the Trend in Your Stocks (and the Market)
One of the easiest ways to make more money in your portfolio (or just lose less when positions move against you) is to follow the trend and know where major support and resistance levels are.
Support and resistance works in all timeframes, so you can check it on a daily, weekly, and monthly basis if you hold positions for long periods. Or, you can use a 5 minute, 30 minute and hourly chart if you’re in the trenches every day.
There is a very simple rule you can follow with trends. When the trend line is broken, exit the position. That’s it.
Nothing complicated, nothing mystical. This rule works even if you didn’t enter the position because of a trendline, but for fundamental or other technical reasons.
For me, trendlines are the guiding star with any position trade, regardless of why I entered the trade.
Even if you never make a trade on the short side, exiting long positions on a trend break can add substantial percentage points to your returns over time.
Trend Following is a great book if you want to learn more about using trends. And Way of the Turtle is another great trend trading book, and also a pretty cool story.
3. Maintain Short Positions in Your Account
If you watch CNBC then you’ve heard “There’s a bull market somewhere.” Well, guess what, there’s also a bear market somewhere (or at least a market correction). Find it and get short.
Even in this unprecedented bull run we’ve had there has been money to be made on the short side. There are always stocks going down. Maybe the sector is out of favor, the company’s product isn’t as good as competitors, or the management just stinks.
Find those companies or sectors moving down and short them with puts, or other bear options strategies. There are multiple ways to short a stock, and you can easily limit your risk if you’re squeamish about shorting.
Conclusion
Market volatility shouldn’t keep you up at night. It should be just the opposite. You should be at ease making money in both an up and down market.
There are a variety of strategies to employ that can cushion your long side losses in a market selloff. Trade hedged positions, follow market trends closely, and always have some short positions in your portfolio.
Don’t let a market correction throw you off your investing or trading goals. There are tools available to make money in stocks that are going down in price, use them.
Pro Tip: If you’re shorting or hedging a position for the first time, either paper trade the position first, or use a very small percent of your capital that you can afford to lose. Paper trading is great to learn the mechanics, but it doesn’t provide the emotional/psychological challenge that real trading does. That’s why I prefer that students of mine trade real money and just keep the position very small to learn. This is especially true when trading options. Start with one contract.
Disclaimer: The author is not an investment advisor and all material in this post, and on the Stockwarrantshq.com site or Facebook page is for educational purposes only. Consult a registered investment advisor for advice on your specific needs and financial situation.