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Assume someone 'knows' that a market crash could occur within the next couple of months, and has no access to 'professional tools'.
What methods could this person use to prepare for the crash in such a way that not only will they not lose money, but they will gain money. Out-of-the-box answers such as "buy gold" (if that's really out of the box) are fine.
This is not a question about whether or not people should trust their assessment of the market.
Let's assume you know reasonably well when a market crash will occur. There is significant risk associated with trying to 'time' the market, and you should make yourself familiar with those concepts before proceeding.
If you are an average 'private person' investor, there are a few ways to make money from a crash, and here are 3 significant ones:
[note - shorting is higher risk than regular stock ownership, because (a) your losses are unlimited, for example if Tesla invented a Vibranium car, and stock rose to $800, you would lose $410 for each share you shorted, which is larger than the amount you originally had; and (b) markets generally go up in value, so shorting is a specific moment-in-time assessment, and shouldn't be done on a consistent long-term basis, unlike simple diversified investment in the stock market]
You could buy a 'put' option. An 'Option' is the right to buy (a 'call option') or sell (a 'put option') something at a specific price, at some point in a specified period of time. For example, buying a put option for AAPL with a $120 strike price that expires in 6 months, would give you the right to sell a share of Apple stock for $120, at any point in the next 6 months. Right now, with Apple trading at $125, you wouldn't want to exercise that option, but if the price drops to $115 in December, you could choose to exercise the option, and sell a share of Apple for more than you would be able to in the open market [really when you exercise the option you would just receive $5, you wouldn't need to actually transfer shares]. The benefit of an option vs shorting the stock, would be that your risk is well defined - you pay some money up front for the right to choose whether to exercise the option, and if the anticipated crash never happens, you don't lose anything further.
You could buy something you think will do well during a bad economy. This could mean gold [common 'market wisdom', but see Bob Baerker's excellent analysis of why this is probably not a great idea], or maybe 'vice stocks', like liquor and gaming which often perform well when people want to drink away their sorrows, or whatever else you think is associated with the crash incoming [maybe if you saw a Covid crash, you could have thought hospitals would do quite well? etc.]. The problem is that you may not know how these things will perform even if you do accurately time a market crash. So there is additional risk here.
You could buy stocks right after the crash occurs. If you have, say, 10k invested in the market today, you could sell it, or otherwise if you just have 10k lying around, you could just hang onto it and wait. Then 'when the crash happens' [this doesn't just mean 1 day of bad results, and can mean many different things that are very very hard to predict, including maybe a 6 month protracted drop in value], you buy things that you think will 'rebound', probably because you believe that panic during the market crash will make people emotional and overreact, thus undervaluing shares they used to own. Note that this practice often has another name 'catching a falling knife', meaning you could easily buy something on the way down, it continues to drop, and never fully recovers.
If you wanted to really 'make a big impact' using any of the above, you could go full-on risk heavy, and trade on a margin account / borrow funds, and invest more than you have in available cash. Of course if you are wrong, and you took out a 2nd mortgage on your house and have losses preventing you from paying it back... the results can be disastrous.
The scenario is a private person (as opposed to a professional in the banking system) who thinks/guesses that the market is going to crash in a short time.
'Short time' as in soon or as in drop very quickly?
A stock market crash is a steep double-digit percentage stock market drop over a period of several days. It involves panic selling and an abrupt, dramatic price decline (see 1929 and 1987). In order to profit from one, you have to have negative delta positions before it occurs (long puts, short equities or futures, long inverse ETFs).
Large corrections and bear markets are a different story. These are much easier to profit from since they usually take months to years to play out (See 2000 and 2008) and one can transition into correction mode. However, the drop in March was unusually fast.
How can this person prepare for the crash in such a way that not only will they not lose money, but they will gain money. Out-of-the-box answers such as "buy gold" (if that's really out of the box) are fine.
There is no such thing in the market as potential profit without risk (I'm ignoring arbitrage since that's in the domain of the pros). You can limit your risk but not prevent losses.
Many recommend owning gold in a bear market/recession. For the past three recessions:
In 1990, it lost about 10% of its value.
In 2000, it did nothing
In 2008 it dropped 30% from its peak price before recovering and ending up 4% for the year
Gold is ‘iffy’ during bear markets/recessions.
If you believe the major US stock markets, will drop significantly (let's say, 20%), and you believe that will happen a couple of months from now,
that is very, very difficult to play.
If you believe it's going to drop "in a matter of days", you just short stuff.
(Short anything/everything you want. Use options, ordinary old shorts. Whatever.)
But if you feel it could happen any time from tomorrow until some months from now, I don't know any good way to play that without taking bad risks.
IMO (someone deeply experienced with derivatives may know better) there is NO way to play that. (ie, without harsh risk.)
(Betting on the markets is unfortunately about two things: direction a n d time. If you don't get both perfectly correct, you get totally screwed.)
The obvious strategy would be to sell up and amass cash, or access to cash equivalents.
In the event of a crash there will be bargains. Invest in "life's little luxuries" such as cosmetics. These are things that people will still buy during a depression. Nothing too high end though... Used car dealerships, people motivated to sell will sell. Make ridiculous offers on foreclosed real estate. Buy undervalued businesses with excess real estate. Buy undervalued businesses that are likely to buy back shares or return excess capital. Buy collectible Harleys and export them. Buy any business likely to be supported by stimulus measures, public works, Keynesian infrastructure projects. Maybe avoid exploiting the great unwashed too unfairly though.
All of these things will make you money, but you have to have your wits about you, consider your mortal soul, and not have lost your own money in the crash.
You need a brokerage account where you can trade options. If you know that the market will crash within two months, buy put options with an expiry date more than two months in the future.
Puts are normally for 100 shares. If the put's strike price is $190 and its price is $10 then one contract will cost $1k and will entitle you to sell 100 shares for a total of $19k.
If the price of the underlying share falls to $90, the $190 put will probably trade for over $100 so you will be able to sell it for over $10k, a gain of $9k. If the contract has time premium remaining, it's better to sell it rather than exercise it.
The advantages of using a put option instead of selling shares short as other answers suggest are:
You don't need a margin account
It doesn't matter if the share price rises temporarily before the crash
Your risk is limited to the option price you paid if you are wrong.
The best way is to BUY PUTS when you know a black swan is going to happen.
Make sure you reverse them correctly not 'sell' puts as that would not clear out your account from the buy puts you did first.
First, your premise is flawed. To make money without the possibility of losing money, you need a market crash and then a recovery. With only a crash and no recovery, one method is to buy puts with long expiration, but this costs money so it's not guaranteed you will recover.
With no access to "professional tools", I'm assuming you will not have a clear signal of when and how much to buy, in general. So, the plan is:
Plan your ETF purchases in such a way that the money will be enough for, say, 18 consecutive months. This will not guarantee that you will make money, but at least will improve the chances for you.
Buy low, sell high. That is it. It's fool-proof because math doesn't lie.
If you are currently invested and believe a crash is coming then sell now (high) and re-buy at the bottom of the crash (low).
If you are not currently invested then wait for the crash and buy low.
In particular this applies to well known companies such as Apple, Walmart, Amazon, etc...
Right now, the EV market in general is being treated like tech stocks during the dot-com bubble of 20 years ago; a lot of blank-check EV companies are rising 200-500% in a given day. If you want to take a gamble on EV then you don't need to wait for a crash. For recent examples look at SPI and SUNW.
