Make Money During Market Mania

By Jon Najarian

This year, we’ve experienced some of the best trading conditions for as long as I can remember, and we’ve only just passed the halfway mark for 2007. I can’t wait to see what the rest of the year will bring!

The surges in volatility and subsequent violent movements in the market have provided opportunities a trader can only dream of. And when they’re coupled with the private-equity feeding frenzy, I’d say we’ve got the most target-rich environment I’ve ever seen.

That’s not to say that it’s been effortless to initiate, hold and/or decide to close trades, especially if you’re not accustomed to checking in on your trading account daily or even more frequently than that. It also doesn’t mean that we aren’t also sometimes forced to sweat it out even during somewhat-more-predictable market conditions.

To the contrary, the current market has been quite challenging, but this has served to keep us on our toes because things literally do change every day!

Don’t Get Lost at Sea

Lack of concentration can kill a great trade almost as fast as purposely going against the odds (i.e., forcing trades when the conditions aren’t overly conducive to initiating them or by taking long shots instead of having solid reasons for entering new positions). And in this hyperactive market, many people are no sooner trying to steady themselves on their sea legs before the boat rocks and reverses course, inspiring many cases of motion sickness.

This unpredictable action can be our friend or our foe, and because it doesn’t look to be going away anytime soon. Take this Friday, Aug. 17, for example — options expiration day always brings heightened volatility to the markets, but because it’s expected, there’s little that can happen on an expiration Friday that can shock a seasoned trader.

However, the whole market was in for a big surprise when, before Friday’s open, the Federal Reserve reduced the rate at which it lends money to banks by a half-point. While this may not seem like something very exciting to the individual investor, it was huge news to the beleaguered credit/lending market … and, in turn, to the investors who were impacted by the subprime-lending mess.

That the Fed was throwing a rope to this troubled sector, was the shot heard ’round the world, so to speak, as the major U.S. indices all started traveling in a seemingly unfamiliar direction — that is, up. This, of course, spilled straight over into the options markets and gave some bullish investors a terrific expiration day — and some bearish investors anything but.

Part Bull, Part Bear Equals One Brilliant Trader

I cannot pound the table enough that you can make what seems like the smartest investment decision — like all the options traders who decided to buy puts on the S&P 500 (SPX), which is a bearish bet on the index to drop — but that you have to do a reality check and only invest with money you can afford to lose.

Just ask those bearish investors who thought that shorting (through buying put options, which is the safest way to be short) the markets was a “sure thing.” Those guys who literally only had hours to go before their profitable puts paid off saw the markets do a complete about-face, thanks to Ben Bernanke’s benevolence toward the credit markets, and we saw a lot of bears licking their wounds instead of lighting up their celebratory cigars.

I can only hope that those who were truly bearish on the markets also had some bullish bets in place to make money in case the market made a sudden upturn. Likewise, I advise any bullish investor to have some bearish trades on the table when the market’s in an uptrend. Having a good mix of calls and puts in your portfolio is the only way to get through this market mania with your original investment dollars and your profits — not to mention, your emotional well-being — intact!

http://www.changewave.com/freecontent/2007/08/freemidjn20070824.html

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