Global Market Comments
April 11, 2025
Fiat Lux
SPECIAL VOLATILITY ISSUE
Featured Trade:
(TESTIMONIAL)
(MAKING VOLATILITY YOUR FRIEND),
(VIX), (VXX), (XIV),
(THE ABC’s OF THE VIX),
(VIX), (VXX), (SVXY)
Global Market Comments
April 11, 2025
Fiat Lux
SPECIAL VOLATILITY ISSUE
Featured Trade:
(TESTIMONIAL)
(MAKING VOLATILITY YOUR FRIEND),
(VIX), (VXX), (XIV),
(THE ABC’s OF THE VIX),
(VIX), (VXX), (SVXY)
Global Market Comments
March 6, 2025
Fiat Lux
Featured Trade:
(A REFRESHER COURSE AT SHORT SELLING SCHOOL),
(SH), (SDS), (PSQ), (DOG), (RWM), (SPXU), (AAPL), (TSLA),
(VIX), (VXX), (IPO), (MTUM), (SPHB), (HDGE)
Some asset classes are reflecting the fact that we are already in a full-blown recession, while others are not. In case I am wrong and we DO go into a recession, knowing how to sell short stocks will be a handy skill to have.
It will become essential to be knowledgeable about all the different ways to add downside protection.
While you are all experts in buying stocks, selling them short is another kettle of fish.
I, therefore, think it is timely to review how to make money when prices are falling. I call it Short Selling School 101.
I don’t think we are going to crash to new lows from here, maybe drop only 10% at worst. So some of the most aggressive bearish strategies described below won’t be appropriate.
If you have big positions in single stocks, like Apple (AAPL), you can execute the same kind of strategy. Selling short the Apple call options to hedge an existing long in the stock looks like the no-brainer here. You should sell one option contract for every 100 shares you own.
There is nothing worse than closing the barn door after the horses have bolted or hedging after markets have crashed.
No doubt, you will receive a wealth of short-selling and hedging ideas from your other research sources and the media right at the next market bottom.
That is always how it seems to play out, great closing the barn doors after the horses have bolted.
So I am going to get you out ahead of the curve, putting you through a refresher course on how to best trade falling markets now, while stock prices are still rich.
I’m not saying that you should sell short the market right here. But there will come a time when you will need to do so.
Watch my Trade Alerts for the best market timing. So here are the best ways to profit from declining stock prices, broken down by security type:
Bear ETFs
Of course, the granddaddy of them all is the ProShares Short S&P 500 Fund (SH), a non-leveraged bear ETF that is supposed to match the fall in the S&P 500 point for point on the downside. Hence, a 10% decline in the (SPY) is supposed to generate a 10% gain in the (SH).
In actual practice, it doesn’t work out like that. The ITF has to pay management operating fees and expenses, which can be substantial. After all, nobody works for free.
There is also the “cost of carry,” whereby owners have to pay the price for borrowing and selling short shares. They are also liable for paying the quarterly dividends for the shares they have borrowed, around 2% a year. And then you have to pay the commissions and spread for buying the ETF.
Still, individuals can protect themselves from downside exposure in their core portfolios by buying the (SH) against it (click here for the prospectus). Short-selling is not cheap. But it’s better than watching your gains of the past seven years go up in smoke.
Virtually all equity indexes now have bear ETFs. Some of the favorites include the (PSQ), a short play on the NASDAQ (click here for the prospectus ), and the (DOG), which profits from a plunging Dow Average (click here for the prospectus).
My favorite is the (RWM) a short play on the Russell 2000, which falls 1.5X faster than the big cap indexes in bear markets (click here for the prospectus).
Leveraged Bear ETFs
My favorite is the ProShares Ultra Short S&P 500 (SDS), a 2X leveraged ETF (click here for the prospectus). A 10% decline in the (SPY) generates a 20% profit, maybe.
Keep in mind that by shorting double the market, you are liable for double the cost of shorting, which can total 5% a year or more. This shows up over time in the tracking error against the underlying index. Therefore, you should date, not marry, this ETF, or you might be disappointed.
3X Leveraged Bear ETF
The 3X bear ETFs, like the UltraPro Short S&P 500 (SPXU), are to be avoided like the plague (click here for the prospectus).
First, you have to be pretty good to cover the 8% cost of carry embedded in this fund. They also reset the amount of index they are short at the end of each day, creating an enormous tracking error.
Eventually, they all go to zero and have to be periodically redenominated to keep from doing so. Dealing spreads can be very wide, further adding to costs.
Yes, I know the charts can be tempting. Leave these for the professional hedge fund intraday traders for which they are meant.
Buying Put Options
For a small amount of capital, you can buy a ton of downside protection. For example, the April (SPY) $182 puts I bought for $4,872 on Thursday allows me to sell short $145,600 worth of large cap stocks at $182 (8 X 100 X $6.09).
Go for distant maturities out several months to minimize time decay and damp down daily price volatility. Your market timing better be good with these because when the market goes against you, put options can go poof and disappear pretty quickly.
That’s why you are reading this newsletter.
Selling Call Options
One of the lowest risk ways to coin it in a market heading south is to engage in “buy writes.” This involves selling short call options against stock you already own but may not want to sell for tax or other reasons.
If the market goes sideways or falls, and the options expire worthless, then the average cost of your shares is effectively lowered. If the shares rise substantially, they get called away, but at a higher price, so you make more money. Then you just buy them back on the next dip. It is a win-win-win.
Selling Futures
This is what the pros do, as futures contracts trade on countless exchanges around the world for every conceivable stock index or commodity. It is easy to hedge out all of the risk for an entire portfolio of shares by simply selling short futures contracts for a stock index.
For example, let’s say you have a portfolio of predominantly large-cap stocks worth $100,000. If you sell short 1 September 2021 contract for the S&P 500 against it, you will eliminate most of the potential losses for your portfolio in a falling market.
The margin requirement for one contract is only $5,000. However, if you are short the futures and the market rises, then you have a big problem, and the losses can prove ruinous.
But most individuals are not set up to trade futures. The educational, financial, and disclosure requirements are beyond mom-and-pop investing for their retirement fund.
Most 401Ks and IRAs don’t permit the inclusion of futures contracts. Only 25% of the readers of this letter trade the futures market. Regulators do whatever they can to keep the uninitiated and untrained away from this instrument.
That said, get the futures markets right, and is the quickest way to make a fortune if your market direction is correct.
Buying Volatility
Volatility (VIX) is a mathematical construct derived from how much the S&P 500 moves over the next 30 days. You can gain exposure to it by buying the iPath S&P 500 VIX Short-Term Futures ETN (VXX) or buying call and put options on the (VIX) itself.
If markets fall, volatility rises, and if markets rise, then volatility falls. You can, therefore, protect a stock portfolio from losses through buying the (VIX).
I have written endlessly about the (VIX) and its implications over the years. For my latest in-depth piece with all the bells and whistles, please read “Buy Flood Insurance With the (VIX)” by clicking here.
Selling Short IPOs
Another way to make money in a down market is to sell short recent initial public offerings. These tend to go down much faster than the main market. That’s because many are held by hot hands, known as “flippers,” don’t have a broad institutional shareholder base.
Many of the recent ones don’t make money and are based on an as-yet unproven business model. These are the ones that take the biggest hits.
Individual IPO stocks can be tough to follow to sell short. But one ETF has done the heavy lifting for you. This is the Renaissance IPO ETF (click here for the prospectus). As you can tell from the chart below, (IPO) was warning that trouble was headed our way since the beginning of March. So far, a 6% drop in the main indexes has generated a 20% fall in (IPO).
Buying Momentum
This is another mathematical creation based on the number of rising days over falling days. Rising markets bring increasing momentum, while falling markets produce falling momentum.
So, selling short momentum produces additional protection during the early stages of a bear market. Blackrock has issued a tailor-made ETF to capture just this kind of move through its iShares MSCI Momentum Factor ETF (MTUM). To learn more, please read the prospectus by clicking here.
Buying Beta
Beta, or the magnitude of share price movements, also declines in down markets. So, selling short beta provides yet another form of indirect insurance. The PowerShares S&P 500 High Beta Portfolio ETF (SPHB) is another niche product that captures this relationship.
The Index is compiled, maintained, and calculated by Standard & Poor's and consists of the 100 stocks from the (SPX) with the highest sensitivity to market movements, or beta, over the past 12 months.
The Fund and the Index are rebalanced and reconstituted quarterly in February, May, August, and November. To learn more, read the prospectus by clicking here.
Buying Bearish Hedge Funds
Another subsector that does well in plunging markets is publicly listed bearish hedge funds. There are a couple of these that are publicly listed and have already started to move.
One is the Advisor Shares Active Bear ETF (HDGE) (click here for the prospectus). Keep in mind that this is an actively managed fund, not an index or mathematical relationship, so the volatility could be large.
Oops, Forgot to Hedge
Global Market Comments
February 13, 2025
Fiat Lux
Featured Trade:
(REVISITING THE GREAT DEPRESSION),
(EXPLORING MY NEW YORK ROOTS)
Global Market Comments
February 12, 2025
Fiat Lux
Featured Trade:
(THE ABC’s OF THE VIX),
(VIX), (VXX), (SVXY)
Global Market Comments
February 11, 2025
Fiat Lux
SPECIAL VOLATILITY ISSUE
Featured Trade:
(TESTIMONIAL)
(MAKING VOLATILITY YOUR FRIEND),
(VIX), (VXX), (XIV)
Global Market Comments
December 3, 2024
Fiat Lux
Featured Trade:
(THE MAD HEDGE DECEMBER TRADERS & INVESTORS SUMMIT IS ON!)
(IT’S GROUNDHOG DAY)
(LAUNCHING "TRADING OPTIONS FOR BEGINNERS”
(SPY), (TLT), (TBT), (VIX), (VXX), (GLD), (SLV)
It is always the sign of a great hedge fund manager when he makes money while he is wrong.
I have seen this throughout my life, trading with clients and friends like George Soros, Julian Robertson, Paul Tudor Jones, and David Tepper.
And wrong I certainly was in 2024.
I thought Trump would lose the election.
Then, I thought that markets would rocket no matter who won. Only the sector leadership would change.
How about one out of two?
The big question is: “Is a stock market crash now in front of us?” The answer is absolutely yes. It’s only a question of how soon.
At this point, we only know what Trump said. And as we all know, what Trump says and does, or can do are totally different things. It all adds a new and constant source of unknowns for the market.
Of course, it helps to have a half-century of trading experience, too. I like to tell my beginning subscribers, “Don’t worry, after the first 50 years, this gets easy.”
Except easy it is not, going into the next several couple of years.
In a few months, it will be Ground Hog Day, and Punxsutawney Phil will call the weather for the next six weeks from his hilltop in Gobbler’s Knob, Pennsylvania.
For the financial markets, it could mean six more MONTHS of winter.
Nobody wants to sell because they believe in a longer-term bull case going into yearend.
In the meantime, they are buying deregulation plays (JPM), (GS), (BLK), and Tesla (TSLA) as a hedge against the next Tweet.
We could see a repeat of the first half of 2017 when markets rocketed and then died.
This is what a Volatility Index (VIX), (VXX) is screaming right in your face, kissing the $13 handle.
The never-ending tweets are eroding the bull case by the day.
So, we’re at war with Canada now? Wait! I thought it was Mexico? No, it’s France. If it’s Tuesday, this must be Belgium.
And our new ally? Russia!
Even the Federal Reserve is hinting in yesterday’s statement that it is going into “RISK OFF” mode, possibly postponing a December interest rate cut indefinitely.
Unfortunately, that completely sucks the life out of our short Treasury bond trade (TLT), (TBT) for the time being, a big earner for us earlier this year.
Flat to rising interest rates also demolish small caps and other big borrowers (homebuilders, real estate, REITs, cruise lines).
The market is priced for perfection, and if perfection doesn’t show, we have a BIG problem.
All of this leads up to the good news that followers of the Mad Hedge Fund Trader enjoyed almost a perfect month in November.
Trade Alert Service in November
(DHI) 11/$135-$145 call spread
(GLD) 12/$435-$340 call spread
(TSLA) 12/$3.90-$400 put spread
(JPM) 11/$195-$205 call spread
(CCJ) 12/$41-44 call spread
(JPM) 12/$210-$220 call spread
(NVDA) 12/$117-$120 call spread
(TSLA) 12/$230-$240 call spread
(TSLA) 12/$250-$260 call spread
(TSLA) 12/$270-$275 call spread
(MS) 12/$110-$115 call spread
(C) 12/$60-$65 calls spread
(BAC) 12/$41-$44 call spreads
(VST) 12/$115-$120 call spread
(BLK) 12/$950-$960 call spread
The net of all of this is that 2024 is looking like a gangbuster year for the Mad Hedge Fund Trader, up 18.96% in November and 72.00% YTD, compared to only 26.62% for the S&P 500.
It seems that the harder I work, the luckier I get.
Hanging With David Tepper
Global Market Comments
August 14, 2024
Fiat Lux
Featured Trade:
(A REFRESHER COURSE AT SHORT SELLING SCHOOL),
(SH), (SDS), (PSQ), (DOG), (RWM), (SPXU), (AAPL), (TSLA),
(VIX), (VXX), (IPO), (MTUM), (SPHB), (HDGE)
Global Market Comments
May 23, 2023
Fiat Lux
Featured Trades:
(THURSDAY, JULY 6 NEW YORK STRATEGY LUNCHEON)
(SHORT SELLING SCHOOL 101),
(SH), (SDS), (PSQ), (DOG), (RWM), (SPXU), (AAPL),
(VIX), (VXX), (IPO), (MTUM), (SPHB), (HDGE)
CLICK HERE to download today's position sheet.
Legal Disclaimer
There is a very high degree of risk involved in trading. Past results are not indicative of future returns. MadHedgeFundTrader.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of MadHedgeFundTrader.com may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies.
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