Jim Cramer says he doesn’t have a crystal ball, but he does have a history of watching market opens.
One rule of thumb is plain as day -- when the major stock indices are down by 2% and there are plenty of stocks down even lower than that, and there are way more sellers than buyers, the smart move is to buy -- no matter how skittish you get.
“I figured out the 2% rule after working with Karen Cramer for many years,” Cramer wrote recently on Real Money. “The late Mark Haines figured out the 10-to-one down-to-up and I integrated it into my calculations.”
Cramer then leverages his “long common short call” strategy, an investment method he covered in "Getting Back to Even," explaining this convenient way to be short without the risk scenario that emerged when many folks bet against GameStop (GME) - Get GameStop Corp. Class A Report and AMC (AMC) - Get AMC Entertainment Holdings, Inc. Class A Report.
“Here's what you do,” he said. “You first go long or buy a deep-in-the money call, typically down about five or six points from the level of the stock. Sometimes you can do it with 10 points "in the money" but that's the most. It's too much capital otherwise.”
As the stock climbs, short it in two-point increments against the calls. That way you have protection.
“When you think that there's going to be a big selloff … then you actually sell more common stock than you own calls,” he added. “That's what I would have done last week, when I said I would short the stock market. Yesterday, when we hit those levels, I would have covered my common short, perhaps even below the level of the call. Today, when the market opened up, I would sell the common once again, enough to cover the short or more.”
Consequently, when the market collapses, the move is to buy. “When it opens up huge you sell or even short again. That has worked so many times that I can't even begin to count it,” Cramer said.