Flash Crash Equals Flash Opportunity

Market crashes occur so quickly these days that we don’t even remember they happened a few weeks later. They can occur over a period of one or two trading sessions or in the span of minutes. And they’re occurring with ominous frequency.

Last month we endured two flash crashes. The first occurred in the gold market. How did that happen? Why did it happen? And more importantly, could you have made money from the crash instead of cringing in the fetal position?

A few days before the crash, Goldman Sachs came out with a warning that gold prices could correct. Less than a week later, prices had fallen by $200 per ounce, decimating many investors who held bullion or gold shares. What did the world’s most plugged in banker know?

Did they know that Cyprus was going to sell $400 million in reserves to meet their financial needs? Did they know that an order to sell 400 tons of gold, an amount equivalent to 1 years supply, would hit the market over a two day period, forcing the gold ETF to sell even more physical gold into a market that was free falling would happen? I don’t believe in coincidences. Especially not in the stock market.

Within a few days of the crash, Goldman came out with a recommendation to go “long” gold saying the selling and correction were over done. I wonder whether they were buying during the crash…

The market today is controlled by machines that use complex mathematical formulas called algorithms. Using these algorithms, the computers enter buy and sell orders in milliseconds, causing tremendous movements in share or commodity prices. These moves are so violent, they force individual investors to invariably sell their shares because they don’t understand what is happening. The machines then scoop up cheaper shares and bank the profits as the algorithms now tell them to buy.

These algorithms use technical levels of stock and commodity prices and volume triggers to determine what to buy or sell. Individual investors still buy based on fundamentals. Technical indicators have nothing to do with fundamentals but everything to do with price charts. It’s an un-winnable game…unless you know how to take advantage of the artificial volatility and make the machines pay you!

You can do this by using a technique called put selling. This is where you sell options on companies you want to own at ridiculous prices. I’m talking about prices 20%, 30% or even 50% below their current prices. These options are worthless, until you get a flash crash. Then, they pick up value fast only to then lose their value once the market stabilizes. When you sell puts, you want the market to stabilize after you sell as the value of the put option you sold decreases, making you a profit when you buy them back at lower prices.

During the gold flash crash, the price of good stocks fell by 20% to 40% overnight. You could have sold puts a further 30% lower and walked away with a pile of cash as the shares bounced back by 10-20% within a few days.

You can do the same thing with stocks. Pick a basket of high quality shares. Enter buy limit orders, good till cancel at levels 30% below the current prices and then wait for the machines to work. When a flash crash hits…the last one lasted for around 8 minutes when a false twitter report caused a 150 point plunge and then a full recovery over a span of just 8 minutes…you could clean up.

Regardless of what the market does, there is ALWAYS a strategy to make money from it. You just need a plan and the inside track to how money works!
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