Option Investment School - Buying and selling Stocks During a Commercial Downturn

Lots of people are faced with the problem of being long (owning stocks) during a economic downturn. The companies held in an investor's profile that were deemed as powerful, secure and effective companies are all of a sudden volatile, risky and packed with holes.

 

During market unpredictability, even the top of companies can be inclined to sell off. A nice gauge to view the entire market is to have a close eye on SPX (the SP 500 cash index). Most stocks are very likely to move with the SPX so use that as your guideline. Some important areas to keep an eye on at this time are at 1150, 1120, 1075 and the substantial support area of 1050-1055 in the event we retest the lows. It is vital to have a strategy for all positions and not fall into these two prevalent discrepancies that countless people create during a financial dilemma.

Appalled by Apprehension:

 

• There is a saying that the right occasion to plant a tree is 20 years ago but the second best time is at this moment. That is a excellent quote for the person experiencing this dilemma who at this time has no blueprint to look after their file. As with anything in life if there is a downside, you must face it. This does not mean that you conveniently sell everything, pull out your cash from the bank and cover it under the mattress (after all the US debt just got downgraded and those $'s could be insignificant one day).

 

• Do not plunge into the "it will come back crowd" or the "if it just gets back to my buy price I will get out". Always remember that the market does not care where you got in or where you get out. Just take a new look and assessment and ask yourself if the same justifications are existing for possessing the company that you obtained when you initially bought it. Millions of people would be much better off if they had taken the same procedure of re-evaluating their situations in GM, Bear Stearns, Lehman, Enron, WorldCom, etc and simply said I will take my loss here instead of waiting until the game is over.

 

• If nothing else, evaluate your standing and use a place to put a stop loss order (a price where you will escape the transaction if it dips further). Furthermore, ask yourself whether or not the money would be better off if spent in something else. Keep in mind that 0 made on AAPL and 0 made on GE both spend the same manner.

 

• There are actually so many other things that is likely to be conducted just like selling covered calls, buying puts or decreasing size as ways to hedge against a reduction in the stock market. Plenty of this information can be acquired by means of a simple Google search, but we are planning on working on some step by step educational videos on these topics in our Trading and Investing 101 series available soon.

The Panic Sell:

• At the same time that you do not want to be intimidated from responding to the market, you do not want to be so attacked by apprehension that you sell in a panic. As mentioned above there are methods to decrease exposure through minimizing position size, hedging or using options like covered calls or long puts. For example: if you owned and operated 200 shares of a stock and did not feel comfortable with the market you could look at selling 1/2 of the position.

 

• Spend some time and study the active status, the companies you hold and the overall market issues before acting. This way you can establish an educated move as opposed to a reckless judgement. Always remember that despite what you think, you are not the most intelligent person in the world, and everything you buy does not have to go up or return. If you do business from more of a watchful procedure with the aim to keep risk capital you will tend to fare a lot better during a emergency than the cowboy that puts it all on the table and goes for home run. I know, I personally have profited during this critical situation from going through the markets in 2008 and knowing what to hope for during rapidly changing volatile markets.

 

• Legends are formed in unpredictable markets like this where reports spread of a few merchants who step in at the appropriate time and take a big risk that pays off. The thing to take into account is that the odds of being one of those is very small and for every one of those that worked out, there are in all likelihood 100 others that took their shot and were unsuccessful. The most crucial thing is to ensure that you and your account are still around whenever the dust settles.

Danny Riley, experienced floor trader of MrTopstep said the following, "I have to say hands down I have never seen anything like this. It is one significant approach after another. The ESU (September ES Futures) just sold off 1144 high after the fed to down to 1098 a 46 handles fall in less than 30 mins. Plus, I have never seen the S&P trade so many various handles up and down." With volatility like this, the smart money is targeted on securing their risk and you should be too!