How to React to the Stock Market Crash
This morning the CBOE Volatility Index (VIX) blew through 70. When it’s gone past 60 in the past, it’s triggered full-on panic mode in the market, leading to huge sell-offs.
Those sell-offs have usually lead to some incredible bargain buying – but you want to make sure that you’re not the one giving bargains away!
That would be capitulation, or when an investor gives up their previous gains by selling a security during a decline in the market.
Often technical support levels mean nothing in a market plunge. Selling brings about more selling, and everything that makes sense stops making sense.
If gold stocks, pharmaceutical stocks, bank stocks, oil stocks, cryptocurrencies and everything else moves in the same direction, that is not normal. It means there is correlation in assets that are supposed to be non-correlated. And that’s when the bargains start to appear in a group.
You see, selling into a panic is always a bad strategy…
If you have hit your stop losses, then you’re going to want to get out of those positions by using limit orders, NOT market orders. Alternatively, if you want to reduce your cost, you could sell options against your stocks since options premiums are elevated in a crash scenario.
Another strategy for trading during a crash, and one I have mentioned before, is to substitute Long-Term Equity Anticipation Securities (LEAPS) for stocks. That way you take your money off the table but still have a longer-term shot at recovery.
The worst time to sell is when you are forced to sell for emotional reasons. That is the exact time you should be buying!
And when it comes to buying, use a multipronged strategy. That means you should dip your toes in the water at different levels. No one knows where the bottom is, so buy in tranches, like thirds. For example, if you like a stock at $20, use the first third of your allocated amount to buy the stock when it is at $20, the next third to buy at $15 and the final third to buy at $10. That way you “scale” into the trade.
Scaling into a trade is a preemptive way of investing, not a reactionary way of investing. When you react, you often make the wrong decision during times of panic.
Action Plan: Join a group like The War Room, where we share ideas and strategies – and keep emotions in check.
As War Room members know full well, we are better as a group – take it from them!
“I can’t think of a better time to be in this room as history plays out before us. Thankful for the guidance from Bryan and Karim and the support of the members here. We’re all gonna make it!” – Earle E.
“I have to admit, had it not been for this room, I would be in the state of panic and heart attack. I’m relaxed and enjoying this ride with its up and downs. I’m sure this is one unique experience that comes with lots of learning. I’m sure it will make me a better trader. Thanks BB, Karim, Mod and all members of this group who are here to help each other.” – Adrien
“Out @ 2.61. Thanks Bryan. Making money on one of the worst days of market history. Pretty cool.” – Doyle B.
About Karim Rahemtulla
With more than 20 years of experience, Karim has mastered the subtle art of options trading. What we admire about him is his ability to score huge gains while minimizing the massive amount of risk that often comes with options. Beyond his expertise in options trading, he is also the author of the best-selling book Where in the World Should I Invest? He publishes weekly about smart speculation in his latest free e-letter, Trade of the Day.