Stock market volatility used to scare me but time has taught me that it works to my advantage and keeps me FOMO-free. Volatility from the eternal fight between bears and bulls ensures that if you missed the boat on a good trade, another opportunity will always arrive. For wheeling strategy, since we ideally start with selling puts on good stocks having a down day, it’s imperative you first determine why the stock was down before initiating a trade. I typically use Stocktwits.com to see the latest updates posted by users and newsbots to figure out what happened.
The “Not so bad” reasons:
- Overall market is down: Barring any black swan events, minor dips and some profit-taking corrections are usually a good thing to take advantage of
- Company issues more stock, i.e. Stock dilution or “secondary offering”, unless the company has been diluting frequently and eroding shareholder value quickly
- Insider sales
- Lock-up expiration day for recent IPOs
- Acquisition of another company: Typically the company that is bought , if public, will see the stock price shoot up to the buy price, while the company doing the buying will see share price drop to reflect cash spent on buying.
- Profit taking on valuation
The “Be careful” reasons:
- Short-attack by a short seller: Is there truth to the allegations ? What is the company and other analysts saying?
- A bearish article by a reputed analyst
- Price target slashing by analysts, especially if its a valuation call
- An important person leaving or fired from the company
The “Bad” reasons:
- Earnings flop
- Reduced forward guidance or earnings warning by the company, especially if tailwinds are long term
- SEC investigation or audits about accounting fraud
