Trading Tips to Profit after a Stock Market Crash

Video Transcript:

(0:00 - 0:46)
What's up everybody and welcome back to the stock market crash of 2024. Now maybe that's a little bit dramatic but the S&P 500 was down almost 10%. It's retraced a little bit but honestly it's far too early to tell whether this is going to materialize into something more serious or it's just a little hiccup and we'll recover in a couple of weeks, who knows.

Now fortunately our main VTS Portfolio has been in safety this entire time so none of this has really affected us. But I am an active options trader as well and when the VIX index spikes up to 65 you can bet I'll be taking some trades. Today I want to go over three tips that I think will help you make better trade decisions and ultimately make more money.

(0:46 - 2:13)

So let's get right into it here. Tip number one is duration is your friend. Look everybody already knows that when volatility spikes up like it has there's no doubt that eventually it's going to come back down.

If you're talking about the VIX then absolutely we will see normal levels in the teens at some point. If you're talking about volatility products VXX, UVXY same thing here. Of course at some point their long-term decay factor will pull them back down.

But always remember that when you're trading volatility being early is the same thing as being wrong. If you open a one-month option for example but this market crash lingers a little while, well eventually you'd be right on the direction but you will have run out of time. It's still going to be a losing trade.

So if you're trading options I would always recommend that you do go about two to three months out on those expirations. Give the market some time to settle back down. And sure the potential profit might be a little lower if you do that but the probability of success will be much higher and that is what we care about the most.

And if you're going to represent your position with a volatility ETF again I would recommend you structure your trade so that you could hold it open for a few months if you had to and it wouldn't crush you. These are not buy and hold instruments but if you have to think SVXY, SVIX, ZIVB, even SVOL and avoid things like just shorting VXX or UVXY outright. That's when you can get into some serious trouble.

The fees are high, you're not in control of your shares and it can definitely rip your face off if the market takes another leg down.

(2:13 - 3:19)

Tip number two, keep your allocation sizes small. Look I know when you see an opportunity like this there is always going to be that temptation to just slide all your chips across the table and go big on a short fall trade.

Maybe you've got that FOMO, you're scared that if you miss this opportunity you're going to have to wait another year to get another one. The thing is though all market crashes have different characteristics. Sometimes they really do flash up and then come right back down.

Other times there's another leg down coming. Maybe over the weekend things will get worse again. And don't ever forget that eventually the market will actually have an extended recession that could easily freeze out your big short fall trade.

Remember it took the S&P 500 many years to recover from the financial crisis. And back to the dot-com bust it took over 15 years to see the market recover. So do I think this is the big one? Well honestly probably not.

I think the market will most likely recover here. But am I sliding all my chips to the middle on this one? No absolutely not. There's nothing wrong with taking some trades but definitely keep them small.

Trust me I've been doing this for almost 20 years and there is always another opportunity on the horizon. You don't have to swing at every pitch.

(3:19 - 4:59)

And tip number three this is a big one that requires discipline but only trade instruments that you fully understand.

I can't tell you how many emails I've gotten this week with people asking for feedback on their trading ideas. What about shorting the UVXY? What about a calendar on the VIX futures? What about one of the cool sounding option spreads like butterflies, diagonals, iron condors? Sure great all of those can work under certain market conditions. But do you even know what those things are? I'm not trying to be rude.

I'm not going to put anyone on blast here. But there were several of those emails where it didn't take more than a couple back and forth to realize that the person didn't really know what they were talking about. That can be extremely dangerous in an unpredictable fast moving market.

Don't trade volatility products if you don't know what causes their price movements. And definitely don't trade them if you don't know the risks involved and how high they can actually spike. Don't trade complex option spreads that you don't have a lot of previous experience with.

When the market is changing direction really fast it's down one day and then it's up the next those option prices can also swing wildly. You don't want to get caught holding something and then say wow I didn't know that's what happens with this type of option spread when volatility goes back down. Now of course you should never trade things you don't understand but that's especially true when we're coming off one of the biggest volatility spikes in history.

There's a lot of moving parts here and I don't want you to get surprised by any of it. Another massively important trading tip here that I actually just did a full video on is to be very careful opening what's called vega positive trades. There could be some huge disappointment on the other side of those so you definitely want to check out this video next.

Thanks for watching.