Learn Trading (and Making Money) During A Recession
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Trading (and Making Money) During a Recession

There are steps you can take to increase your chances of trading profitably during a recession. 

These include:

Volatility Index

During a recession, the stock market tends to “pull back”, meaning that there will be a drop in the price of stocks. Volatility in the market (S&P 500 Index) is measured by the Volatility Index (VIX).

When volatility increases, it's in your best interest to choose further out of the money strikes while also extending duration.

Additionally, when the VIX is low (around15), it’s important to trade small and only use around ~20% of your buying power. 

By trading small during periods of low volatility, you’re protected against having your existing positions show a loss once volatility expands.

Sell Call Options

Another strategy you can consider is to sell call options, especially on stocks that you believe are overbought.

By selling calls, you can use that premium to roll down any existing put positions that are challenged.

During a recession, around half of your positions can be short calls, and the other half can be far OTM puts on large companies with strong brands.

Rotate Into “Safe” Stocks

During a recession, there should be a flight to safety. Stocks like Dollar General, Amazon, Apple, or even the SPY or the SPX, can be substituted instead of more speculative underlyings. 

At this moment (January 2022) there are good opportunities in Amazon, Adobe and Microsoft. 

Trade Small when VIX is Low

As touched upon earlier, during periods of complacency when the VIX is trading at around 15, it's best to manage your size and make sure that you're not trading too large. 

If during periods of low volatility you're using about 40% - 50% of your account, then when volatility increases from 15 to around 35, you're going to have to spend a lot of your time, and your available buying power, to defend existing positions - as opposed to opening new positions and collecting higher premiums. 

One of the best things that you can do is to always trade small during periods when the VIX is below 20. When the VIX increases, you’ll be provided with an opportunity to earn up to three times more money for selling the same strike price that you would have sold when volatility was low. 

Shift Towards Quality Stocks and Preserve Buying Power

The best way to trade during a recession is to make sure that you position yourself well during periods of complacency and then shift towards more quality stocks with strong brands (Apple, Microsoft, Dollar General, SPY or SPX). 

Additionally, you could sell put options that are farther out of the money - or simply stick to selling call options.

Perhaps most importantly, it’s best to make sure that during periods of complacency when the VIX is trading around 15, you're not using up a lot of your buying power. 

That way, when the VIX increases you can make sure that you are able to open new trades and collect higher premiums.

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About the Author David Jaffee

I (David Jaffee) help people become consistently profitable traders while minimizing risk. I graduated from an Ivy League University and worked at some of Wall Street's most successful investment banks. Subscribe to my YouTube channel for valuable videos - BestStockStrategy YouTube Channel​. Finally, if you're looking to Land a Finance Job, then I've put together the best step-by-step course at LandaFinanceJob.com. My personal website is DavidJaffee.com.

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