Author: Chris Hood
Be sure to check out new episodes of my video podcast each week, where my ace pupil Brian Jones and I talk the ins and outs of options trading- and give you insights and strategy that you can immediately put to work for you in the markets.
Quite a few retail traders are getting destroyed right now.
Why is this?
They are continuing to be bulls in what is definitely a bear market.
Most newer traders have never known a bear market, where equity prices are down 20% or more from recent all-time highs. In fact, before the pandemic in March 2020, we had been in a continuous bull market for nearly 11 years.
The typical 25-year-old trader was just 14 during the last sustained downtrend.
Economists love to argue over the exact timing of bear markets.
We are likely still feeling the fallout of the COVID crash back in 2020, as it seems to be a textbook example of how market cycles operate.
Because it takes a while for the fundamental economic changes that precipitate bear markets to manifest, warning signs are often ignored, and markets continue to rise.
The big run-up that peaked in January of this year led investors and traders to assume nothing was wrong.
In reality, we had a Federal Reserve that continued to pump money into the market to keep it afloat.
Now we’re dealing with the fallout of those decisions.
Though economists who aren’t active traders are content to just sit back and theorize about the causes, we traders must focus on the short-to-medium term price action.
It didn’t matter that the market was accelerating towards a cliff during the past two years.
All we did was play the charts and make money. In the strictest sense, it may have been the first phase of a bear market, but it was time to trade bullishly for us.
When our charts tell us that the market is trending upwards, bullish trades make us money.
However, when the market shifts, we cannot buck the trend and survive.
The outlook on the SPY, DIA, IWM, and most of the major indexes at the point seems bleak. They’ve lost the 55- and 100-day moving averages and the 200-day SMA.
Prices below that level indicate a lack of institutional support.
Big money, and by this, I mean hedge funds, banks, and super trader types, are all out of the game.
They’ve fled to cash or safe-haven assets and are just watching the collapse.
Contra-indicators to market price action, such as the value of the dollar (UUP) and 10-year bond yield (TNX), have spiked and continue to rise.
Not an incredibly rosy picture.
Will it last for a few months or a few years? Who knows?
The great thing about options trading is doesn’t matter which way the market moves. Up or down, we make money.
In fact, the past week has been one of our most profitable in some time.
Short trades make money even faster than long ones.
Sure I’ve taken some losses on my long trades, but the gains on the short side have been such quick, big winners that the net profit has been tremendous.
The take home here is that you don’t need to run for the hills when the market falls.
Short options trades – long puts, bear put spreads, bear call spreads, and put butterflies – are just as profitable as bullish ones.
You can also learn to protect your stock holdings with collars and married puts.
So if you’re new, this will be one hell of a learning experience.
If you’re frustrated, sit out for a bit and just paper trade. The only way to learn is to stay active.