# How to make money in a down market, contributions/suggestions please



## Pluto (Sep 12, 2013)

The focus of this thread is not about timing, picking tops and bottoms and the like. It's about making money in a bear market ie severe down trend. Too, we are not in a bear market so I'm not talking about employing such a strategy right now, I'm just trying to plan ahead and be prepared when it arrives. 

The purpose is generally to make money. But more specifically the strategy is to enable one to preserve capital with out selling and having to pay capital gains on ones favorite stocks. 

So I'm wondering if anyone has ideas on what securities would be best to buy puts (at a time when one believes a bear market has arrived.) 

One security on my potential list is SPY nyse. tons of options lots of volume. 

Then I came across SSO (Pro Shares Ultra S&P 500 etf). This etf invests in the S&P 500 but uses margin, so the swings in prices are huge compared to SPY. The added volatility seems to be good. In 2008-9 these shares fell way more than the SPY which is good for this strategy as the further and faster the security goes down the puts sky rocket in value. Incidentally this etf would have been a good buy to go long in 2009. Vastly out performed the S&P 500. 

For myself I'm only interested in puts that go out about a year, maybe more so the risk isn't as great. 

Anyone been thinking or has used strategies to make money in a down market? Please tell of your experience pro or con. 

Any ideas, pros, cons? other securities that would work well for puts?


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## lonewolf (Jun 12, 2012)

Pluto, buy puts on spy @ the top of wave 2 sell puts @ max momentum down in wave 3

Moon wooble on Oct 13, Mercury retrograde till the Oct 27, solar eclipse in the 3rd or 4th week of Oct all within the potential Mar/Uranus crash cycle could crash this market. The stock market crash index still has not registered -10. If we don't crash this Oct I think we will get a better shorting opportunity after a rally that retraces aprox a fib .618 of the decline from the all time high. (rally would be wave 2). I m looking for the DJI be below the 09 low by June 2016.


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## Pluto (Sep 12, 2013)

Thanks. Your vote is for SPY. Can you tell me why spy vs sso?


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## leslie (May 25, 2009)

If you don't want to sell because that would trigger tax on gains, then try selling short a look-alike security. That will zero out the Beta at least.


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## lonewolf (Jun 12, 2012)

Pluto I think the DJT index will get hit one of the hardest since the lows made in the 70s the dow is up 30x the dow transports are up 74x but the DJT option are less liguid & I think the spy & or spx will offer the best puts with more money to be made. The SPX contract is 10 times bigger then the spy so when options were cheaper a few months ago for the far out of the money contracts it was the contract to use to cut down on commission costs. Have to run will get back to you latter.


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## james4beach (Nov 15, 2012)

I've traded several bear markets. My best success was with outright short positions (not options) on things like XIU and SPY -- the popular index ETFs. Beware that the tax consequences are a bit tricky, as even CRA isn't crystal clear on handling of proceeds of short sales especially if your position spans multiple years.

Buying put options on these indexes is cleaner from a tax perspective, but I've found it more difficult to make money in that way. Personally I've only lost money by going long put (or call) options.

I recommend that you avoid any inverse ETF, double-inverse, proshares ultra etc. These are day trading vehicles and are only meant to track the index for ONE day. They invariably lose money for longer positions. The ETF provider tries to very clearly spell out that these are only meant to be used for single day positions.


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## Pluto (Sep 12, 2013)

Thanks for the input as it is helping to refine a plan. So far SPY and SPX is at the top of my list. But I'm still looking at SSO due to greater leverage. 

In the meantime i'm encouraged to follow through with this plan due to the fact that my TSLA puts are up over 55% and have countered losses in my other stocks during this correction. Pluto's Little Hedge Fund. lol. 

(Incidentally, and to reiterate, I'm not talking about buying puts on spy or what ever right now. I have some faint in my bear market indicator which hasn't triggered yet. That is: 1. Total market Cap > US GNP or GDP and, 2. Major index falls below its 270 day SMA.) 

Thanks again for the suggestions. Keep them coming.


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## Rusty O'Toole (Feb 1, 2012)

I have been selling calls and call spreads.


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## lonewolf (Jun 12, 2012)

Went long SPX puts on todays strong rally, 

DEC15 800 put @ 1.65
June16 800 put @ 4.5
Dec16 900 put @ 10.3

safe some ammo for latter.


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## lonewolf (Jun 12, 2012)

Pluto said:


> Thanks for the input as it is helping to refine a plan. So far SPY and SPX is at the top of my list. But I'm still looking at SSO due to greater leverage.
> 
> In the meantime i'm encouraged to follow through with this plan due to the fact that my TSLA puts are up over 55% and have countered losses in my other stocks during this correction. Pluto's Little Hedge Fund. lol.
> 
> ...


 Be carefull if market is falling sharply & through 270 day moving average the premiums might be to high to buy puts. Puts are a lot cheaper on a strong rally then they are in a strong decline.


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## james4beach (Nov 15, 2012)

Taking bearish positions with indices at all time highs... yeesh. Not something I'd do, personally.

You have to remember you're trading directly against central banks. *They buy stock indices* (ETFs and index futures).

Over the years, I've found the best thing to do is just stay out. This is why I have hardly any stock exposure. The central banks can't keep it up forever, but they have other ways to screw you -- they can shut down markets, halt trading, ban short selling. There's a huge bag of tricks here, and it's all designed to screw you -- the bear. Actually it's designed to screw anyone who isn't a bankster, which is why you _will _inevitably lose.


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## dime (Jun 20, 2013)

I've never been much of a shorting fan or options. Too easy to lose money. If you like the idea of covered calls, there's some ETFS that will do all the hard work for you for a small MER fee. 

In the US there's SHY or SJNK for some short term high yield bond funds.

Diversify, and aim for some yield so you're paid to wait. Look for companies with growing earnings so the capital value of the company will grow with time. 

Have a long term vision, bear markets don't last forever. Try to raise cash prior to the downturn and then use the corrections as buying opportunities to position your portfolio for the next stage of the cycle. 

Overall you want to lower your exposure to risk and volatility.


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## Pluto (Sep 12, 2013)

lonewolf said:


> Be carefull if market is falling sharply & through 270 day moving average the premiums might be to high to buy puts. Puts are a lot cheaper on a strong rally then they are in a strong decline.


Good point. I noticed that on tsla puts. On a huge drop down (in stock price), (put) price skyrockets, as does volume, on a huge up day/week (put) price drops as does volume. Like clock work. buy on a low volume up day, sell on a high volume down day.


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## Pluto (Sep 12, 2013)

My new top pick for a security to make money in a down market is Direxion Daily S&P 500 Bull 3X Shares (US;SPXL) which was posted on etfstraders charts in the luck vs skill thread. Check out his charts: Post 98 in luck or skill thread

http://canadianmoneyforum.com/showthread.php/27209-Market-out-performance-Luck-or-Skill/page10


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## GoldStone (Mar 6, 2011)

Pluto said:


> My new top pick for a security to make money in a down market is Direxion Daily S&P 500 Bull 3X Shares (US;SPXL)


What's a down market?

1. A market that has topped up and is about to reverse the trend?
2. A market that is trending down?
3. A market that has bottomed out?

SPXL would be a wrong choice in 2 out of 3 of those options (unless you planned to short it).

Perhaps you meant SPXS?

:wink:


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## Pluto (Sep 12, 2013)

GoldStone said:


> What's a down market?
> 
> 1. A market that has topped up and is about to reverse the trend?
> 2. A market that is trending down?
> ...


Yes, spxs. thanks. 

A down market is a market that is trending down. For example, the last 5 years it has trended up. I suspect that won't go on forever. Various clues suggest the market is forming a top; I want to be ready with a plan to make some money on the downside.


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## geoffh (Nov 15, 2014)

james4beach said:


> Taking bearish positions with indices at all time highs... yeesh. Not something I'd do, personally.
> 
> You have to remember you're trading directly against central banks. *They buy stock indices* (ETFs and index futures).
> 
> Over the years, I've found the best thing to do is just stay out. This is why I have hardly any stock exposure. The central banks can't keep it up forever, but they have other ways to screw you -- they can shut down markets, halt trading, ban short selling. There's a huge bag of tricks here, and it's all designed to screw you -- the bear. Actually it's designed to screw anyone who isn't a bankster, which is why you _will _inevitably lose.


This is a huge misconception. Central banks DO NOT buy ETFs or index futures. That is not the mandate of any central bank in the world. Quantatative Easing or any other monetary policy performed by central banks is limited strictly to securities affecting interest rates (treasuries, mortgage securities, reserve requirements, etc).


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## Pluto (Sep 12, 2013)

james4beach said:


> Taking bearish positions with indices at all time highs... yeesh. Not something I'd do, personally.


Even so, james, my plan is to do it. I'm not going to bet the farm however - No Boy Plunger hero moves. Except for my initiation to bear markets, which was a dreadful lesson, I have managed to escape the bulk of bear market drops. Each time I looked back and asked myself, what stopped me from buying some puts? Just didn't have the confidence. I'm pretty sure the next one is the one. 

Part of the trick is if it goes in the wrong direction, don't hope, don't pray, just get out immediately and take a small loss. The other part is sizing up general market conditions. That is, waiting for characteristics of tops to emerge, then waiting for the actual price and volume to confirm a downtrend. My key economic condition is low unemployment (which emboldens the US Fed to raise rates). I got it straight from the Fed: if one wants to anticipate what the Fed will do and when, watch for low unemployment and wage increases. How low? As low as it was the last few times the market topped out and tipped into a bear market. I have no intention of fighting the fed, or an up trend in stocks. So I'm going to want to see the market weaken after one or more rate rises, or weaken in anticipation of a rate rise. 

If one has a look at this article, the contrary connection is clear. A good economy (as defined by low unemployment) is bad for stocks. That is one of the greatest insights of contrarian strategies. Those who don't see it, and believe a good economy is good for stocks, are pretty much doomed to buy high, and sell low. 

https://finance.yahoo.com/news/sturdy-u-payroll-gains-eyed-060234465.html

One only has to wait patiently for price and volume action to confirm a down trend.

In the meantime, I'm still long on stocks with earnings and price momentum.


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## supperfly17 (Apr 18, 2012)

Pluto said:


> Even so, james, my plan is to do it. I'm not going to bet the farm however - No Boy Plunger hero moves. Except for my initiation to bear markets, which was a dreadful lesson, I have managed to escape the bulk of bear market drops. Each time I looked back and asked myself, what stopped me from buying some puts? Just didn't have the confidence. I'm pretty sure the next one is the one.
> 
> Part of the trick is if it goes in the wrong direction, don't hope, don't pray, just get out immediately and take a small loss. The other part is sizing up general market conditions. That is, waiting for characteristics of tops to emerge, then waiting for the actual price and volume to confirm a downtrend. My key economic condition is low unemployment (which emboldens the US Fed to raise rates). I got it straight from the Fed: if one wants to anticipate what the Fed will do and when, watch for low unemployment and wage increases. How low? As low as it was the last few times the market topped out and tipped into a bear market. I have no intention of fighting the fed, or an up trend in stocks. So I'm going to want to see the market weaken after one or more rate rises, or weaken in anticipation of a rate rise.
> 
> ...


Interesting take on things. I still dont understand how lower unemployment, increasing wages would contribute to the stock market losing points, i would think the opposite.


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## geoffh (Nov 15, 2014)

This is why 80% of retail investors under perform the market. I agree that the market looks overdone but, then again, it looked that way 6 months ago. If your view is that rising rates will send stock indexes lower, you're going to be waiting another 6-9 months. If you're bearish, don't get short one the most aggressive bull markets in the last 50 years. Look for opportunities in other markets. If you think inflation is coming (which I gather from your higher wages, higher growth comments indicate), short bonds or go long beaten down precious metals. I don't know how you can look at all the financial markets and say shorting the equity markets is the best play on the board right now. Crazy.


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## Pluto (Sep 12, 2013)

geoffh said:


> This is why 80% of retail investors under perform the market. I agree that the market looks overdone but, then again, it looked that way 6 months ago. If your view is that rising rates will send stock indexes lower, you're going to be waiting another 6-9 months. If you're bearish, don't get short one the most aggressive bull markets in the last 50 years. Look for opportunities in other markets. If you think inflation is coming (which I gather from your higher wages, higher growth comments indicate), short bonds or go long beaten down precious metals. I don't know how you can look at all the financial markets and say shorting the equity markets is the best play on the board right now. Crazy.


I'm bullish, not bearish. I'll get bearish when a down trend is apparent.


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## Pluto (Sep 12, 2013)

supperfly17 said:


> Interesting take on things. I still dont understand how lower unemployment, increasing wages would contribute to the stock market losing points, i would think the opposite.


It defies conventional wisdom. But if one looks at a graph that compares historical unemployment to the stock market index, stocks bottom out when unemployment peaks and stocks tend to peak when unemployment is low. It doesn't mean one can predict exact bottoms and tops. But it is a sign to become more vigilant. Low unemployment and rising wages gives the green light to the Fed to raise interest rates. They don't like inflation, rising wages is inflation. But I'm not trying to scare anyone out of stocks. This is a bull market. The trend is your friend. I'm just saying we are getting some, but not all of the conditions that constitute a top.


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## geoffh (Nov 15, 2014)

Pluto is right. There's been a fair amount of research that GDP and stock market returns have zero or actually a negative correlation over time. I think that's one of the reasons that this bull market has been so powerful; growth has been slow and steady with no rush to raise interest rates and hurt the case for high-yielding, high-performance equities. 

For an example, look at what the Nikkei is doing during their latest recession; their market is screaming to new, logic-defying highs. That's a market that I'm dying to short. What's the inverse of the expression: "don't try to catch a falling knife?"


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## Rusty O'Toole (Feb 1, 2012)

The Nikkei is screaming upward because the Japanese government is flooding the market with yen, driving down its value and fueling a stock market boom. Their design is to stimulate the economy by creating inflation. It isn't working any better for the overall economy now than it has for the last 25 years but it has created inflation in the stock market.


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## lonewolf (Jun 12, 2012)

How big is the carry trade out there ? The Yen rallies the S&P drops, The Yen falls against the dollar the S&P rallies


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