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How to Play a Stock Market Crash

Stocks in this article: SDS QID APOL

If you're looking for some trading vehicles that will give you lots of leverage for any market crash, than I would suggest you consider some double- and triple-leveraged bear ETFs. Let me be clear that these types of ETFs are for trading purposes only. They are not the kind of ETFs you want to invest in for anything longer then a short-term trade.

One of the more popular and liquid bearish ETFs is the ProShares UltraShort S&P 500 Fund (SDS). This ETF seeks daily investment results, before fees and expenses that correspond to two times the inverse of the daily performance of the S&P 500. If you want to short the Nasdaq, I would suggest looking at the ProShares UltraShort QQQ Fund (QID), which seeks daily investment results that correspond to two times the inverse of the daily performance of the Nasdaq 100 index. Remember, you can always play the options on these ETFs as well, but don't expect to see great spreads between the bid and ask of the calls or puts.

For triple short leverage, traders should focus on the ProShares UltraPro Short S&P 500 Index Fund (SPXU), ProShares UltraPro Short Dow 30 ETF (SDOW) and the ProShares UltraPro Short NASDAQ 100 ETF (SQQQ). These ETFs seek to achieve results, before fees and expenses, which correspond to three times the inverse of the daily performance of the S&P 500, Dow and Nasdaq. If the market crashes, these ETFs will be great ways to play it, but remember that with lots of leverage comes lots of risk. So, again, use them as trading vehicles one, or play the options for a more defined risk of your capital.

More on ETFs

Often when a stock market crashes, some of the best trades are to short the worst sectors, or the sectors that have recently been struggling. I would consider taking a look at the education stocks for this type of short play. The group has recently come under fundamental and technical attack that could be creating a perfect storm for the shorts.

From a technical standpoint, names such as Strayer Education (STRA), Apollo Group (APOL) and Capella Education (CPLA) are all trading below both their 50-day and 200-day moving averages. This is a major technical warning sign, coupled with the fact that all of these names have seen sharp drops of late on very heavy volume. Savvy market players might want to consider using put options to short these stocks, which will give them a clear defined amount of capital at risk.

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