So, if there is a way to make money when the market goes up, there must be a way to make money when the market is going down. The way for me is puts. As I defined earlier, a put is nothing more than buy the option to put a stock to someone at a certain price on or before a certain date.
So if we go back to our portfolio that we created, we can again see the big movers. Now looking at the chart of a volatile stock, we might find that it is at historical highs or on the high side of its’ normal range. I used to see this and say, well maybe I can buy into that one in a few months if it comes down.
NOT ANYMORE!! Now I look at it and say, this is a potential candidate for buying a put option on it. I again generally stay within the 1 1/2 to 2 month time frame. This gives that stock the time to have that downward move that I am expecting. If I think that it is going to take longer than that to drop, then I will put it on my watch list and wait for the right time. On to a new example.
I have been watching a stock for a while now that is currently at $35.63. The 52 week high is $38 and the low is $12. So I am checking the chart and it seems that it is in its high cycle. After looking through the information available online, I believe that the price will fall to around the $28 in the next 6-8 weeks. So I am looking at the Jan 08 expiration date at the $30 put. They are trading today for $1.15. I am going to wait until Monday or Tuesday of next week and will probably buy 10 of those contracts. I am guessing that the price will drop by then to approximately $0.95. So my initial investment will be $950 ($0.95 x 100shares per contract x 10 contracts) plus commission.
If the stock goes up or stays the same, I lose my investment. However, if the stock goes down to $28 like I think it will, that option will be worth at least $2. When I sell those 10 contracts for $2, it will be worth $2,000 ($2 x 1000shares).
I will continue posting a few more articles on this topic in the near future. Notice that I will not give out recommendations or stocks that I trade. This is purely because I do not believe in giving or taking tips. If I give a tip and one of my friends executes that and it loses money, I stand the risk of him being upset. However, all of the examples that I use are real stocks, real prices and many of them are trades that I am executing in my portfolio. Good luck on all your investments.