Crash 2008: The best way to play market volatility
Today's Financial News - Posted October 4, 2008
With world bourses going crazy, even experienced investors are uncertain of where to turn. Karim Rahemtulla of Xcelerated Profits Report reveals the best way to play this market volatility – and see big gains!
Baltimore (TFN): In recent weeks markets worldwide have experienced extreme volatility, both to the upside and the downside. Investors are drawn between the urge to sell in a panic or to sweep up depressed shares at record low prices. What’s the best way to play these markets?
I’ve invited Karim Rahemtulla of Xcelerated Profits Report to share his suggestions for smart traders. Welcome back to the show, Karim.
So what do you recommending your readers to do right now? Are you encouraging simple stock investing or are you avoiding?
Karim Rahemtulla: Well we’re taking the tact where you have to really understand what’s happening in the market and you have to adapt a strategy that works in this market because it is so volatile there are certain things that work right now that didn’t work six months ago and may not work six months from now, but for now there are things that are working.
Laura Cadden: Well let’s talk about some of the strategies that have worked for you guys. I know one of your editors, Lee Lowell, made a killing betting against oil recently. How did he play that?
Karim Rahemtulla: Well, Lee’s a former NYMEX trader and market maker so he has very good connections down in the oil pits and he was getting a lot of good information showing that the positions that were building in oil were really speculative positions. So he made a bet against oil for our readers about a month ago when oil was trading in the 130-140 range. As you know oil has collapsed down to 90.
So that’s why we have these savvy guys on the team because the only way to really make money in this type of market is to know what’s going on on the floor.
Laura Cadden: And he did it by shorting the stock?
Karim Rahemtulla: Yes; he put option in the futures market –
Laura Cadden: Oh, he did do options. Okay.
Karim Rahemtulla: Yeah.
Laura Cadden: So describe what an individual would do following some of the strategies you’ve been recommending.
Karim Rahemtulla: Well it’s really important first of all to understand that you have to expand your horizons. You can’t just look at investing just as stocks. You have to bring in these things called options and that’s what we use and we use options in conjunction with stocks.
For example, if we buy a stock that we think is going to go up, but because the market’s so volatile and it may go down we might buy the stock and buy a put option with it. It’s called a married play where if the stock goes up you’ll make money. You’ll lose some money on the put option, but if the stock collapses your put option will increase in value giving you the returns that will offset the losses.
Laura Cadden: You’re kind of hedging yourself.
Karim Rahemtulla: You’re hedging and this is all about hedging right now because it’s very unpredictable.
Laura Cadden: Is there a play that you could recommend for our viewers?
Karim Rahemtulla: Well right now we really like gold. We’ve liked gold for awhile after it came down because what’s happened is the price of gold has come down significantly in the past three or four months and what we did is we took advantage of that. Not by buying the physical metal, but by looking at the gold stocks because even though gold has come down about 15 percent, gold stocks have come down about 50 percent.
So we took a position in a company called Gold Corp. which is an extremely low cost producer. The symbol is GG on the New York Stock Exchange. What we did was we bought that and we sold an option against it and the exact play is basically this. Gold Corp. is trading at about $36 today.
So we would buy Gold Corp. at 36 and we would sell the Gold Corp. January $32.50 option against it. The symbol on that is GGAZ. We would receive a premium for that. The amount of premium is about $7.00 per share. So that drops our cost in Gold Corp. down to $29 a share. It gets taken away from us at 32.50 giving us a return of about 11 percent in the next four months.
But the great thing is that if Gold Corp. doesn’t get taken away, let’s say gold price is correct, then we own it at 29, which is almost at its 52 week low and again representative of gold physical prices of around $500 an ounce. So we’re more than happy to hold that position and then sell another option against it and continually selling options against it until we reduce our cost hopefully to zero one day.
Karim Rahemtulla is the editor of Xcelerated Profit Report. Learn more about his service here.
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