Those who do not learn from history are doomed to repeat it.
To maximize leverage while minimizing risk during a crash, I suggest options. More specifically S&P 500 Index Options. I would use DJIA options, but they are not as widely available or as liquid as the S&P 500 options. The following charts are of the '29 '87 & '97 crashes. They compare the DJIA to the S&P 500 and are based on percentage of movement.
As you can see, the S&P 500 out performed the Dow in all three crashes. The biggest difference was when it was 2% above the Dow at the bottom of the '87 crash. So, basically on Black Monday in 1987 the Dow fell 22% and the S&P fell only 20%. On the bright side, the S&P 500 bounces higher then the Dow after the crash. You will see why this is a good thing once I explain my strategy, but before I do that here's one more chart. This chart is a 1-minute intraday chart of July 24, 1998. It compares the DJIA with the S&P500.
The important thing to notice is that the DJIA and S&P500 turn at the same exact time. During a crash, the S&P 500 and DJIA will both ricochet off of the bottom within minutes of eachother. The reason I mention this is that we don't need to watch the S&P 500. We can concentrate on the Dow, while trading S&P 500 options and rest assured that they will both turn at the same time.
OK, now for a crash course (forgive the pun) in options. If you know what options are, then you can skip the rest of this paragraph. An option is exactly what it sounds like. You have the right to exercise it or not to, and that is why you risk losing nothing other than the purchase price of the option. There are several types of S&P 500 options, I will be explaining the most common. An S&P 500 option controls 100 shares of the S&P 500. If you were to actually buy those 100 shares with the S&P at $1,140 it would cost you 100 x $1,140 or $114,000. A bit steep. This is why we use options. You only buy options if you think that the price is going to move drastically in either direction. You buy CALL options if you think the price is going to move up and PUT options if you think it's going down. The STRIKE price is the price that you have the right to buy (CALL) or sell (PUT) the option for. It's time for an example. Let's set the S&P 500 at $1,000 to make things easier. You think that the S&P 500 is going to go up quickly, so you buy an S&P 500 CALL Option AT THE MONEY (STRIKE price of $1,000). The price you pay for the option when it is AT THE MONEY is usually 5% of the total cost (100 shares x $1,000 = 100,000) or $5,000. One month later the S&P is up to 1,050. You don't think it is going any higher so you decide to EXERCISE your option. All in one transaction, you buy 100 shares at $1,000 and sell 100 shares at $1,050 for $5,000 profit (100 x $1,000 = $100,000, 100 x 1,050 = $105,000 ($105,000 - $100,000 = $5,000). This is the option's INTRINSIC VALUE which is always what you get when you EXERCISE an option. When you subtract the cost of the option $5,000 from the exercise amount $5,000 you get nothing which is why S&P 500 options are usually sold instead of exercised. Options are usually only exercised on the day of expiration. That leads me to the last, perhaps most important thing to consider when using options, the expiration date. Options expire on the 3rd Friday of the Month. Once an option expires, you no longer have the right to exercise it (you have lost your money). When you sell an option, it's value is determined by adding it's INTRINSIC value to it's TIME value. An option's TIME value is usually around $200-300 per month. Using the above example let's say that you bought an S&P 500 September 1,000 CALL on June 1. You then decide to sell it on July 1 with the S&P 500 at 1,050. The selling price is determined by three things INTRINSIC VALUE, TIME VALUE, RISK/REWARD VALUE. The RISK/REWARD VALUE quite simply is what someone else is willing to pay for your option, which is really the only thing that counts when you are trying to sell it. The INTRINSIC VALUE is $5,000, the TIME VALUE is roughly $500 (2.5 months left until expiration). The actual value is usually never below the INTRINSIC value. This option would probably sell for around $6,500. I determined this by adding a $1,000 RISK/REWARD VALUE to the option price. I have noticed that in the past year investors usually pay roughly $1,000 per quarter above the options INTRINSIC + TIME VALUES. So your profit would be $1,500. Because we have been in a long bull market, PUT options are cheaper than CALL options. AT THE MONEY PUTS usually cost about 3% of the total cost of the controlled shares. OUT OF THE MONEY options are much cheaper than AT THE MONEY OPTIONS. This is because the odds are that the market is not going to move that drastically. I suggest spending some time learning more about options before you consider trading them.
OK, Here's the strategy. Wait for the 1st step back correction and right shoulder bounce. When the market is 45% of the way back up to the top buy an S&P 500 December PUT Option. The Strike Price should be roughly 10% out of the money (if the S&P is at 1,300, buy the 1,100 PUT. Buy an option that is divisible by 100, these are much more widely traded and offer more liquidity). This option should cost around $500 in October. The market should then peak within a week after your purchase, then the slide begins. On the Monday of the crash, sell your put option 30 minutes before the market closes. Try to sell it while the market is still dropping rapidly. You will get a much higher price when the market is still moving in your direction. The value of your option will be cut in half just 30 minutes after the bottom when the market is bouncing back up rapidly. I expect the bottom to be on Tuesday morning, but it could happen on Monday this time. What will your option sell for? During the '97 mini-crash an S&P 500 Dec 800 PUT was worth about $4,000 just before the S&P bottomed out at 855. Three weeks before with the S&P at 980 the same option was worth about $300. The only thing that had changed was that the demand increased due to the mini-crash. Investors were willing to pay $3,700 in premiums to buy an option that was more than 50 points out of the money! Of course, 30 minutes after the bounce this option was only worth $2,000. Let's say the crash bottoms out on Tuesday 40% below the high. You sell your option on Monday just before close with the market down 35%. Let's say you bought with the market down 5% so the total movement from buy to sell is 30%. The S&P 500 topped at 1,350 and was at 1,300 when you bought the 1,100 PUT for $500. You sell the PUT option Monday just before close with the S&P at 945 ($1,350 -30%). The PUT option will be worth at least $20,000 (INTRINSIC=$15,500 + TIME=$300 + DEMAND=$5,000) depending on the demand.
So now it's 25 minutes before close on Monday and you have $20,000 in your account. Next you buy some call options. Get them close to the money, but still out of the money. If the S&P is at 945 buy 950, 975 or 1,000 calls. You are only going to hold them for 2 days, so buy short term calls (November). For the same reasons that the PUTS are expensive, the CALLS will be cheap. Investors will be in a panic to sell their CALL options, not realizing what a bad time it is to sell. Use 50% of your money to buy calls Monday before close. Save the other 50% to buy calls Tuesday morning hopefully just before the bottom. Buy 10 CALLS as close to the money as possible for under $1,000 each. It's hard to tell when the exact bottom will be. Just after the market closed on Monday of the '97 mini-crash a story came across yahoo entitled "NO BOTTOM IN SIGHT FOR THE DOW". Of course, roughly 45 trading minutes after this story came out the market bounced off of the bottom violently. I call this a "contrarian indicator". Also keep looking a the 1-minute chart of the Dow. The market is usually in it's steepest decline just before bottoming. Watch the intraday charts Tuesday morning. When the line is going just about straight down then use the rest of your money to buy more CALL options. This might be hard to do because the market will look like it is going to fall to zero by the end of the day. Just know that the moment that things look their worst for the Dow is followed immediately by the bounce.
Sell your CALLS (all 20 of them) on Wednesday Morning or when the Dow is 50% back up to Friday's closing price from the bottom. What are they worth? The S&P 500 will be up about 18% from the bottom. Say your first 10 are 950 calls and the second 10 are 900 calls, the bottom was at 880 so when you sold it was at 1,038. Your 950's are worth $10,000 each (INTRINSIC=$8,800 + DEMAND = $1,200) and your 900's are worth $15,000 each (INTRINSIC=$13,800 + DEMAND = $1,200). $10,000 x 10 = $100,000. $15,000 x 10 = $150,000. This is how you turn $500 into $250,000 in less than a month during a crash. Please note that this is a modest estimate. The PUT and CALL options might actually cost 1/2 as much as I have estimated here. That alone would bump the return up to $1,000,000. This crash should also be closer to 50% from top to bottom. Also note that this strategy would have worked both during the '29 and '87 crashes. Here are the charts that show this.
Here is an example of how to determine where the short term bottom will be. When I looked at the chart below I got that feeling of panic that you only get when the Dow is going almost straight down.
As you can see, the Dow was falling like a rock and seemed like it could lose 1,000 points in the next few hours. As soon as I saw the above chart and got this feeling I knew that the short term bottom was near. The chart below shows what happened next.
As you can see, the Dow stopped falling almost immediately at 8,880, then paused and fell another 20 points before bouncing up 120 points. Usually the Dow is in it's steepest intra-day decline just before the bottom.
The next page is my short term update page. I will try and update it on a weekly basis.