How I Survive and Thrived During the Market Crash of 2008

Let me start by saying that I am not some sort of financial guru. I am a Veterinary Pathologist and I run my consulting business from my office at home. However, I have been investing in the stock market since 1991, and trading options since 1995. As a scientist, however, I have a great deal of interest in statistics, and natural phenomena, and as a Pathologist, I have trained my eyes for pattern recognition. This is probably why the Elliott Wave Theory appealed to me. It is not a big stretch of imagination to think that mass psychology could be measure, and that patterns of euphoria or extreme lack of confidence and fear dictate the sequence of waves in a market chart.

I learned about the Elliott wave from Robert Prechter’s book “At the Crest of the Tidal Wave”, and how to analyze an chart from Beckman’s book “Elliott Wave Explained” in the mid 90’s. That was a very lucky occurrence because I begun to trade call options based on my analysis, at a time when most investors profited dramatically. At the same time, I learned about the power of options: limited risk! While my winners could make me a great deal of money, my losses were always limited. I always thought that there must be some option’s strategy that I could use that would maximize my rewards and limit my risk, under most circumstances.

By the end of 2000, my strategies begun to fail as the markets topped out. Here again, the limited risk saved me from big losses, but inevitably, I was hurt by some of my long-term holdings. All in all, I faired well, but soon discover that the Elliott wave and options combination was not so easy to trade when the bear market of 2000-2003 had begun. However, I did know where we were: Wave A of a long-term correction that could last about a decade. Frustrated with my inability to trade the downside, and fearful for my long-term investments, I stopped trading until October 2002, ironically the bottom of the market, when I started to explore options strategies other than buying calls and/or puts. I took courses, read books, and begun to see the market rise when the war in Iraq begun. As the market rose, I understood that it was merely a countertrend wave B, that could end at any minute, in unpredictable ways. You see, countertrend waves have very little predictable value. I took the rally of 2003 as an opportunity to sell my long-term stock positions and to experiment with various options strategies.

Using Optionetics’ Platinum software I back-tested several approaches until I ran across the PCCRC.
By 2005 there were very compelling, strong stocks such as AAPL, GOOG, RIMM and DNA, just to name a few, that were performing as they would have in 1999. It was clear that I needed a strategy that would take advantage of strong movers, while protecting me from the impending Wave C. I was completely unable to call the top. Month after month from 2003, I speculated that the Wave B was near the end. I gave up on Elliott wave forecasting, but did not give up on the theory. Wave C could begin at any minute, and the long-term data supported that opinion, but the exact count, from the bottom of 2003 was nearly impossible to make with all certainty.

I started trading the PCCRC strategy in 2005 by selecting “high fliers”, until one day DNA jumped more than 10% on great news about its cancer drug (April 2005). Two years earlier DNA had already jumped strongly and it continue to rally after such news. I entered a PCCRC, and in the process discover a second approach: selecting stocks jumping more the 10% with great fundamental news. I noticed that after news IV declined, only to rise again in subsequent weeks, and the stock could move strongly up subsequently as well, I just had to give it sufficient time. The rallies could be immediate, but sometimes were delayed. Only the PCCRC would give me peace of mind to trade momentum stocks during a bull period that could end at any time. I begun to profit consistently, like never before in my life. I had losers, to be sure, this is inevitable in any market, but by 2006 I had grown my account by 35%. All the while speculating that the market was at its peak. Although I did not avidly read Bob Prechter’s forecasts, I was aware of his overall predictions and largely agreed with them, but with the PCCRC I was trading successfully a bull market in limited stocks. Being completely out of stocks by then, I kept the bulk of my nest egg in CD’s with only 4.5% annual interest at first, but as I was able to select the best rates from my Schwab account, I picked a few long term 5-5.5% CD’s. In retrospect, that was a great move, as I avoided Real Estate and Corporate or Municipal bonds.

2007 was my best year ever, with a return of 75% in trading my account. Most of my trades were profitable by virtue of the strong move up in the underlying, but in August 2007 an unexpected thing happened: Volatility spiked and many stocks went down, even in my portfolio. This was a test of my PCCRC as the S&P 500 lost 150 points in just a few days. I had my best month ever until that point, and I learned the power of Vega, the Greek that I like to call the bull. The best was yet to come. I was ready for the eventuality that was to be Wave C, but I had found a method to profit for the markets, if the forecast was completely wrong.

I continue to trade as though the markets were going to continue to go up. I selected stocks to trade that included: 1. High fliers (best performers of the last 90 days). 2. Breakouts to new 52 week highs. 3. 10% jumpers post-earnings with increased guidance. 4. Stocks with I.V. Skews. I began to feel most comfortable with the 3rd strategy, but they all produced gains very consistently with only the occasional loser. However, in the 3 years that I have been trading the PCCRC, I never had a loser exceed 1% of my account in max loss. This is remarkable because potentially, any PCCRC entered by my rules, have a maximum loss of 2%. So the PCCRC strategy has a built-in money management mechanism. So long as you keep you max capital per trade to 10% of your account and 2% of it at risk, you don’t even need a classical stop loss. The PCCRC has a natural decision point one week before expiration, at which time one may decide to rollover the trade, or simply exit the trade. I have found that having this decision point forces me to face the facts: if I am not making money, I can hardly justify doing a rollover, or perhaps I find that there is little money to be made with the rollover. In either case, I am forced to take action.

2008 started rather unremarkably in my account, I begun to see that 2007 had been an exceptionally good year and that I was not about to repeat the performance. However, I set 30% increase as a reasonable goal for the year, and stuck to my approach. By Aug-Sep, I was still picking the best performing stocks, even when the financial crisis became evident. As the markets begun to decline, volatility begun to run up to historical levels, amazingly, every single one of my trades was profitable and by large amounts. I begun to roll down my outstanding puts (long puts that exceed the number of short puts), and closing my outstanding calls as measures to reduce volatility, while keeping my trades opened to the possibility of profiting to continued decline, or a potentially strong reversal. By the end of the week of 10/10/2008, the stock market had had the worst week in history. I had the best single week in my trading career, and because I had no stock, bonds or Real Estate holding (other than my home), you may say I also had the best week for my entire portfolio. October, far exceeded my previous best month of Aug. 2007.

As 2008 draws to a close, I am looking forward to a bullish 2009 with lots of capital in my account and confident that the PCCRC will also give me a strong year, this time with selective bullish picks. In fact, I am starting to buy small portions of the Spiders (SPY), which I will continue to buy once a month until the markets are closer to their 5 year high. So long as the markets are closer to the 5 year lows, I will continue this strategy. Nevertheless, the PCCRC, more than ever, will be my preferred approach for 2009 as well.