3 best strategies for declining stock market
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When you trade currencies or commodities, you may not be very aware of “market crashes” and large sell-offs on the stock market. However, for stock traders specifically, there’s much tension related to a recent significant decline in stock prices. Many of them have a cash account, i.e. don’t have the ability to play on the short side.
So, this article is for those who are still searching for profitable opportunities in the “red area” of falling stocks.
Option 1. Buying 3x inverted ETFS:
When there’s a bloodbath on the stock market, you can play one short side without actually selling any stocks. There’s a set of instruments designed exclusively for that purpose. They allow you to benefit from declining stock indexes, and sometimes, even certain sectors. I’m talking about “inverted ETFs” - complex structured products, which are traded on the exchange just like any stocks.
For example, you may purchase SQQQ, a 3X short for “QQQ”, which follows the Nasdaq stock index. When tech stocks are falling (and they are falling quite quickly), SQQQ grows. The recent decline of Nasdaq creates buying opportunities for SQQQ.
Option 2. Buying low-beta and negative-beta stocks.
Not all stocks are following the main trends. Some of them are more robust and have even strong opposite reaction when the broad market movements. The less stock correlates with a benchmark (a stock index), the less it’s beta is. Sometimes, it’s even negative.
For example, take a look at MCD - McDonald’s corporation. With a beta of 0.5 as of November 23, 2018, it shows outstanding performance in comparison to the broad market:
Or, let’s take SBUX (Starbucks). With a beta of 0.49 it seems bulletproof, considering the previous decline in major stocks.
Of course, not only beta parameters is important, but that’s one of the main factors which trader has to take into consideration while making decitions.
Option 3. Buying volatility ETFs.
Every time a stock market declines, we observe increasing volatility of ATM options linked to the corresponding index futures (VIX). This volatility can not only be observed but also it can be traded via volatility ETFs.
If you expect a stock index to fall, you can purchase VXX (short-term volatility) or VXZ (long-term volatility). You can see below what happens while the stock market sell-off:
Good luck and have a good trading!
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