A stock markets is a place where two types of people meet up in the morning: Those with experience and those with money
When the day ends, they exchange assets and go home.
Joking aside, the recent frenzy gripping the market, feels like the cherry on top of a melting ice cream during a summer's hot day. There may be a few licks left but it is about to get messy. While I'm not actively sleuthing for a short (though hedging, if done correctly, is a prudent thing to do), I have a plan for the next melt-down. While I won't spell all of it out here, sharing one idea may be helpful to some and I value your feedback.
The chart shared above doesn't necessarily mean that a sell-off is nigh, far from it. Especially as from my side of the desk I am viewing this as a bull-market with a long runway ahead of it; I am also of the view that it is far easier to pick a bottom then picking a top. Turning left to March of 2020, with the benefit of hindsight, the S&P followed the trajectory of the green line i.e. when a majority of the stocks within the S&P started trading above their 20 day moving average, after having corrected to 2 Standard Deviations, the broader market followed.
I never expect prices to move in a straight line and ideas typically take (much) longer to play out then initially planned, so, next time we experience a strong sell-off to the point where a majority of the S&P stocks correct to 2 Standard Deviations and then reverse, I will most likely purchase SPY calls with 4 to 6 months to expiration with a .15 Delta or so.
There are variations in how to go about this and while experience plays a role, playing the long side of the market in this manner,
will contain the risk to only the amount spent on the call(s) and return on risk justifies it sufficiently for me.
There is no way to know with 100% certainty that my view of the market being in a bullish posture will play out and things can change quickly, but as it stands today, this forms part of my plan in how I will engage with the next sell-off.
Happy trading!