Recently, one of my students asked what I learned from the 2008 crisis and how I would handle things if a similar situation ever arose again in the future. Let's see then, how we can prepare for a possible collapse.

1. Stock Market Crash - Have you got a
plan?
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Options Trading

2. Stock Market Crash
Recently, one of my
students asked what I
learned from the 2008 crisis
and how I would handle
things if a similar situation
ever arose again in the
future.
Let's see then, how we can prepare for a possible collapse.
In 2008, I was still quite new to options trading, so I could
not benefit as much from it as I could in a similar market
situation now. Trading in a stock market crash or fall does
not only test you technically, it also puts you under a very
strong psychological pressure. 2

3. S&P500 futures
Nowadays, more and more systemic risks emerge in the markets.
That results in a constant increase of the likelihood of a crash. At the
end of August 2015, we witnessed a mini-collapse, which lasted
only for a few days, but it evoked more violent emotions from the
market participants. Here is the daily chart of the S&P500 futures:
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4. VIX index chart
Mini-crashes usually close with a very fast
retraction, followed by a period of sideways
movement afterwards. The big question is, how
does this chart continue? There are expectations
around the US interest rate increase, the usual
Greek para, the Chinese balloon, decreasing
market liquidity and so on. These contributed
together to a tremendous jump in the fear and
greed index recently and it is still about 2x higher
than this year's average. Here is the daily chart of
the VIX index:
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5. VIX index chart
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6. The lessons of 2008
Let's see what are the lessons learned from the 2008
crisis, which can be used even tomorrow if the market
drops.
Psychological lessons
If there is a big problem, the drop will be long and intense.
That is, you do not need to rush, you should not be
greedy. You have to wait patiently for the right moment to
open a position. The media complicates people’s situation
further in this case, because they broadcast world's end
interviews, articles and programs. This usually encourages the
unprepared traders to hasten to uncontrolled acts. Your
trading plan should be prepared for this possibility now, you
should not improvise under pressure of the given moment.
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7. The lessons of 2008
You should have an idea as to where (or at what symbol) you will
realize the profit. You do not have to sell immediately when you
have won 100-200% since if the drop is big, you can easily profit up
5000% (!!!) too. Sometimes, it is more difficult to watch the big
floating profit than the loss. The big floating profit has a huge
psychological "pressure" too. Many people get out after just a few
hundred percent profit, and then beat their heads against the wall,
when they see the big drop. That's why I wrote that coolness and
calmness are essential. A bear market is much more difficult to
trade than the increase because it is characterized by stronger
emotions. A slowly growing bull market does not evoke emotions,
while a heavily falling bear does.
You cannot trade with good sense under heavy emotional pressure.
Therefore, you need a plan and guidelines that you will follow.
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8. Trading Lessons
There is a high volatility on a Bear Market, which means you really
have to pay attention to the options premiums. If you are a
beginner, you should not try to write uncovered options when
volatility is high, even if the amount of a certain premium seems
very attractive. The least risky bear market strategy is the purchase
of Put options with some time value decreasing supplement (e.g.
Put Spread).
What I certainly would do differently now than I did in 2008, is to
continuously build a position as the market drops and pay attention
to having a strategy with the highest possible degree of positive
volatility exposure. I would not trade many products, only indexes
and the VIX derivative products. The futures options have the best
leverage, but I would suggest trading the ETF versions of these (eg.
SPY, DIA, QQQ, etc.) in case of a low account balance.
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9. Trading Lessons
Do not try to catch the top and the bottom of the market,
you will not succeed. The point is not catching the turning
point, but to trade the trend, once you have successfully
identified it.
In 2008, you did not have to hurry, because the market fell
for several months. Traders had time to think, to create a
plan. As a beginner, I acted in haste at that time, but today
I would not commit the same mistake. Here is the 2008
monthly chart:
Specifically, the market fell over 10 months. The real drop
started in September 2008, exactly seven years ago...
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10. Technical lessons
The bid/ask spread widens in case of high volatility, so you
have to stay away from market orders, you should only
trade at limit price. Don’t be surprised if a specific order is
not fulfilled immediately, liquidity can dry out for a while
in case of a bigger drop, see the CHF case. Because of the
heavy market changes resulting from the wide bid/ask
spread and the high volatility, it is much better to cover
your position with options, or to use options to trade your
market idea at all events. Using stop orders in a very
volatile environment is for people with strong nerves
only …
You have to trade quite differently when volatility is high
than in a low-volatility market. 10

11. Feel free to ask me!
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Email: gery@optionsrules.com
My webpage: http://www.optionsrules.com/
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