When the market opened up 300 Dow points this morning and I said you should "fade it" or take profits, lots of skeptics said I would be wrong and then these same skeptics asked how I could be so right within an hour or two.
The answer is pretty simple. I am no seer. I have no crystal ball. But what I do have is a history of watching these openings over a 40-year period and here is what I have found.
When the averages are down about 2% and there are stocks that are down more than that, and, at the same time there is a 10-to-one sell to buy ratio, you have to buy something, no matter how painful that may be.
I have no crystal ball. But what I do have is a history of watching these openings over a 40-year period and here is what I have found.
I figured out the 2% rule working with Karen Cramer for many years. The late Mark Haines figured out the 10-to-one down-to-up and I integrated it into my calculations.
At all times I ran what was known as a balanced book, with many shorts to offset my longs. I didn't do it in a traditional way. I would be what was known at long common and short call. I pretty much pioneered this method and spent about 100 pages in "Getting Back to Even" explaining this convenient way to be short without the risk of what I see so many people, like those who bet against GameStop (GME) and AMC (AMC) .
Here's what you do. You first go long or buy a deep-in-the money call, typically down about five or six points from the level of the stock. Sometimes you can do it 10 points "in the money" but that's the most. It's too much capital otherwise.
As the stock climbs, you short it in two-point increments against the calls. That way you have protection.
When you think that there's going to be a big selloff, as I said last week, then you actually sell more common stock than you own calls.
That's what I would have done last week, when I said I would short the stock market. Yesterday, when we hit those levels, I would have covered my common short, perhaps even below the level of the call. Today, when the market opened up, I would sell the common once again, enough to cover the short or more.
In other words, I scalped it. I would have sold stock short and then covered Monday, and start all over again selling common at the, high and then covering as the market turned down.
Now, I am not a trader any longer. I don't even like trading. But when we see a situation like last week, where I had seen that for 20 years the market had been down, it was worth it to short. Twenty years of down is a lot of down.
When the market collapses like yesterday, you buy. When it opens up huge you sell or even short again. That has worked so many times that I can't even begin to count it.
So, to put it another way, if you were brave enough to buy when the market was being crushed, you get the reward of selling for a profit the next day. The bold, the ones who buy into the moment of ugliness, get to win, but only if they ring the register when it is up. And then they can start the short all over again against those same calls.
Again, I don't like to recommend shorting. But sometimes, if you can put the calls on first, and then sell common, you have a terrific insurance plan and can scalp a lot of money. The problem? So many others do this that the scalping ultimately makes the market turn down. But that's the best way to profit from volatility I have ever seen and I want you to know how to do it so you can profit, too.