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Trade Like a Hedge Fund: Bottom Fishing

Trade Like a Hedge Fund: Bottom Fishing

On Friday the DOW sold off over 1,000.

But through the Trade Kings scanners, we immediately saw a change in how the big institutions were trading…

So, what kind of tactics are the big hedge funds using right now?

Experienced traders know that even in a bear market, monster rallies can be right around the corner, persisting anywhere from a couple days to a couple weeks.

For example, look at this rally on the S&P 500 starting in mid-June and lasting through mid-August:

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If you’d entered a swing trade at the start of this rally, especially if it’s a longer dated swing trade (say 30 days), you would’ve made absolutely stunning profits.

However, if you didn’t catch the bottom, your options may very well expire worthless.

So, what do institutions do when selling commences, creating conditions for a possible bear rally?

Well, it’s a simple tactical adjustment.

The hedge funds tend to buy longer-dated, FURTHER FROM THE MONEY options that they can comfortably let go to zero (position sizing is important here).

Right now, we’re seeing options dated for late September to mid-October, about 7 strikes out of the money, consistently hitting the Trade Room scanners.

This set of “dimensions” on an option trade means the contract is small enough (as are the number of contracts) that a trade going to zero can easily be offset by 5 to 10 times when they “catch” the bottom and have a runner with plenty of time to expiry.

In the Trade Room we call it bottom fishing, and ANY time we get a big selloff we can almost always count on institutions doing this like clockwork.

So, my coaching tip for the day is to set up a paper trade account, experiment with following the hedge funds, and take advantage of this selloff.

It’s pretty amazing to see a 500% profit option trade when you successfully “catch the bottom!”

Until next time,

Bryan Klindworth
Senior Analyst, Kings Corner

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Bryan Klindworth

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