Last week, on Monday, there were rumors of a possible war with Russia. The market opened down by a good margin and presented an excellent opportunity to make a short-term gain. Today I would like to discuss how we did it at Terry’s Tips and how you can do it next time something like this comes along.
How to Play War Rumors
When the market opens up at a higher price than the previous day’s highest price or lower than the previous day’s lowest price, it is said to have a gap opening. Gap openings unusually occur when unusually good (or bad) news has occurred. Since there are two days over which such events might occur on weekends, most gap openings happen on Mondays.
A popular trading strategy is to bet that a gap opening will quickly reverse itself in the hour or two after the open, and day-trade the gap opening. While this is usually a profitable play even if it doesn’t involve the possibility of a war, when rumors of a war prompted the lower opening price, it is a particularly good opportunity.
Over time, rumors of a new war (or some other economic calamity) have popped up on several occasions, and just about every time, there is a gap (down) opening. This time, the situation in Ukraine flared, even though any reasonable person would have figured out that we were highly unlikely to start a real war with Russia.
When war rumors hit the news wires, there is a consistent pattern of what happens in the market. First, it gaps down, just like it did on Monday. Invariably, it recovers after that big drop, usually within a few days. Either the war possibilities are dismissed or the market comes to its senses and realizes that just about all wars are good for the economy and the market. It is a pattern that I have encountered and bet on several times over the years and have never lost my bet.
On Monday, when the market gapped down at the open (SPY fell from $186.29 to $184.85, and later in the day, as low as $183.75), we took action in one of the 10 actual portfolios we carry out for Terry’s Tips paying subscribers (who either watch, mirror, or have trades automatically placed in their accounts for them through Auto-Trade).
One of these portfolios is called Terry’s Trades. It usually is just sitting on cash. When a short-term opportunity comes along that I would do in my personal account, I often place it in this portfolio as well. On Monday, shortly after the open, we bought Mar2-14 weekly 184 calls on SPY (essentially “the market”), paying $1.88 ($1880 plus $12.50 commissions, or $1900.50) for 10 contracts. When the market came to its senses on Tuesday, we sold those calls for $3.23 ($3230 less $12.50 commission, or $3217.50), for a gain of $1317, or about 70% on our investment. We left a lot of money on the table when SPY rose even higher later in the week, but 70% seemed like a decent enough gain to take for the day.
War rumors are even more detrimental to volatility-related stocks. Uncertainty soars, as does VXX (the only time this ETP goes up) while XIV and SVXY get crushed. In my personal account, I bought SVXY and sold at-the-money weekly calls against it. When the stock ticked higher on Friday, my stock was exercised away from me but I enjoyed wonderful gains from the call premium I had sold on Monday.
Whether you want to bet on the market reversing or volatility receding, when rumors of a war come along (accompanied by a gap opening), it might be time to act with the purchase of some short-term near-the-money calls. Happy trading.
Tags: Auto-Trade, Calendar Spreads, Calls, diagonal spreads, Monthly Options, Portfolio, Profit, profits, Puts, Risk, SPY, Stocks vs. Stock Options, Terry's Tips, thinkorswim, VIX, Volatility, VXX, Weekly Options