Wednesday, September 17, 2008

Market Panic - What Now?

Is this a good sign?
Is this the market panic which heralds the perfect buying opportunity? Yes – there is panic out there. Naked fear and confusion is driving the market. Run for safety – the markets are crashing.

"People are scared to death. Who would have imagined that AIG would have gotten into this position?"
Bill Stone, chief investment strategist for PNC Wealth Management.

So what am I doing in this tumultuous market?

Contemplating trades that make money in such situations. I am not taking about speculation but honesty I am tempted to put some money on GS. Looks like we are overdoing the selling here by imagining the same dismal fate for every investment bank.

I want to play the volatility and put a strangle on the market. In other words buy some calls and puts to make money if the market moves significantly in any direction. A SPY 115/125 strangle will cost me about $450 per contract. I will make money is SPY trades below 115 or above 125 in 4 weeks. What are the chances of SPY moving 4% (5 point move on the SPY) in 4 weeks – I would say pretty high.

Buy low and the market is low and probably headed lower so it is time to buy. Instead of paying down my mortgage – I am diverting any extra cash I have towards buying the market. Looks like everything is on sale so why not double down and buy some more. Selling now (in a panic) and buying when the market rebounds would put us in the buy high and sell low category – and you don’t want to be there.

Watch & learn – Interesting that all the talk of recovery in the second half of 2008 has suddenly disappeared. Caution, panic and 'don’t know' are the emotions you see on CNBC. The role of the government is being rewritten everyday. The rules of the game are being rewritten everyday. It is depressing but also interesting!

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