Volatility is definitely the name of the game in 2008.  But today’s action in the S&P Index showed that volatility and wild swings are not just for weekly or monthly cycles.  Intraday volatility was in full force today with multiple crosses of the zero line, and a S&P Index trading range (820-913) that approached 100 points from low to high.  That 92 point trading day measured against yesterday’s S&P close of 852 is a staggering 11%! The S&P itself closed up just short of 7%.

So how do you trade these crazy high volatility markets that have become the norm?

A) Buy and Hold!  No Trading for me.

B)  Forget trading.  My money’s much safer under the mattress.

C)  I’m a bank CEO, and I have no time to trade.  I’m to busy spending the taxpayer bailout money!

D)  No money to trade.  I went broke from attempting to trade the market earlier in the year!

E)  Very patiently, and methodically, with well hedged positions and a mix of long and shorts.

If you answered E, then there’s a good chance your 2008 returns are crushing the rest of the market participants, perhaps even etching out a modest gain for the year.

With my own account, I stay away from intraday trading, and leave that type of behavior to the maniacs on TV.  But I’m not even close to a buy and hold investor either.  On the contracy, I do pay my broker several trade commissions on any given week, but I hedge almost everything I buy, and I almost always have trades on both sides of the fence - long and short.

My methods for hedging my positions:

Covered calls - great to hedge a portion of your downside, and do very well in a flat market, but they won’t protect you against a radical decline that goes past the point of your covers.


Collars, Index puts or Proshares Inverse ETF’s - Collars limit both downside but also cap your upside potential.  Index puts protect your downside but leave your upside uncapped.  But the two disadvantages are that they can be very costly (especially during times of high volatility), and they are often difficult to implement correctly for beginners.  Proshares Inverse ETF’s offer a quick and convenient way to play the downside in the market, without worrying about option pricing or short selling rules.  But it is critical to check the prospectus of proshares to understand the risks of using them, including counterparty risk and correlation risk.

Mix of long and short positions - Balance your portfolio with a mix of long and short positions to reduce some of the wild swings in your account, and help you sleep better at night.