Making Big Gains When the Market Makes Big Moves.
Today, 03 September 2020, we saw a big dip in the market. The S&P 500 dipped 3% by 11:30 AM EST and this is how I took advantage of the it:
Every morning, when I wake up, I take a look at futures. On this particular morning, they were all in the negatives. Then, I looked at my watch lists. By primarily looking at my list of the top 500 market cap companies, I anticipated a dip in the market. I’m always looking for a market dip. In my opinion, market dips provide a great opportunity to make money in both short and long term investments. Next, I looked at the VIX, the S&P 500 volatility index, and saw an increase. That cemented my decision.
I went to my go-to stock for market dips, SPXS. SPXS is a 3X weighted bear EFT that tracks the S&P 500. Every 1% move downward in the S&P will yield a 3% increase in the price of SPXS. While I could have decided to short SPXL, a 3X weighted ETF that moves in the same direction as the S&P 500, I prefer to go long on the inverse ETF. The reason being is that when you short a stock or buy put options, your potential loss is unlimited, but when you buy a call option or the underlying stock, the potential downside is only your principal investment. In other words, when you buy puts or short stocks, you can lose more than you put in, and when you buy calls or go long on stocks, you can only lose what you put in.
This morning, SPXS started the day trading at slightly below $5/share. So, I bought some call contracts with a $5 strike price for $25/contract. Then, it was just a matter of waiting. Immediately after purchasing the contracts, I put in a sell order for half of the contracts at $50/contract. As the morning went on, I periodically checked on the option prices, and as it started approaching my $50 limit, I noticed there was still some downward momentum in the S&P 500. So, I raised my limit to $55. As it approached $55, I noticed there was still some momentum and ended up selling at $60 for a 140% gain.
You may be wondering why I only sold half of my contracts. A few months ago, I started experimenting with the idea of selling enough contracts to cover my initial investment and holding on to the remaining contracts in an attempt to maximize profits. At this point, even if the price of the contracts fall to zero, I would not have lost any money on this trade; however, if the prices continue to go up, there’s a potential to reach much higher than a 100% profit margin. As of writing this, it is now after hours and the market seems to be recovering. I will continue to monitor price actions until tomorrow and will decide to either continue to hold or to sell the remaining contracts when the market re-opens.
I would love to get your thoughts on this strategy and whether it is something you’ve implemented yourselves in the past, and remember, investing is risky. This is not advice. I am merely sharing a strategy I’ve used to make some quick profits to later allocate towards my long term investments. I am not a financial advisor, nor do I give financial advice. Also, Webull is giving away 2 free stocks valued between $6-$1600 when you sign up and fund your account with an initial deposit of $100 within a month if you use the following link:
I will be compensated when you use this link, but it will cost you nothing. Happy Trading!
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