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!
Trading the financial markets is associated with increased level of risk. Past performance is not indicative of future results. All materials are provided for educational purposes only and by no means may serve as a trading or investment advice.
Editors’ Picks
EUR/USD edges lower toward 1.0700 post-US PCE
EUR/USD stays under modest bearish pressure but manages to hold above 1.0700 in the American session on Friday. The US Dollar (USD) gathers strength against its rivals after the stronger-than-forecast PCE inflation data, not allowing the pair to gain traction.
GBP/USD retreats to 1.2500 on renewed USD strength
GBP/USD lost its traction and turned negative on the day near 1.2500. Following the stronger-than-expected PCE inflation readings from the US, the USD stays resilient and makes it difficult for the pair to gather recovery momentum.
Gold struggles to hold above $2,350 following US inflation
Gold turned south and declined toward $2,340, erasing a large portion of its daily gains, as the USD benefited from PCE inflation data. The benchmark 10-year US yield, however, stays in negative territory and helps XAU/USD limit its losses.
Bitcoin Weekly Forecast: BTC’s next breakout could propel it to $80,000 Premium
Bitcoin’s recent price consolidation could be nearing its end as technical indicators and on-chain metrics suggest a potential upward breakout. However, this move would not be straightforward and could punish impatient investors.
Week ahead – Hawkish risk as Fed and NFP on tap, Eurozone data eyed too
Fed meets on Wednesday as US inflation stays elevated. Will Friday’s jobs report bring relief or more angst for the markets? Eurozone flash GDP and CPI numbers in focus for the Euro.
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