This Stock Is an Options Trader's Dream

Some of the biggest gains in the stock market don't come from buying the next unicorn IPO or biotech breakout. While it's certainly nice to do, professional traders don't rely on these uncommon superstars. In fact, some of the most profitable stocks for traders are the biggest losers...

As long as a stock moves - up or down - we can make money from it. And just last week, Money Morning Quantitative Specialist Chris Johnson found such a play. The wrinkle is that he thinks the stock will make a big move to the downside.

And we're going to buy put options on it.

We'll get to the stock in a minute, but first it is important to tell you that buying puts is not the same as shorting a stock. Shorting, or selling a stock short, is simply the act of selling first and buying later.

The problem is that shorting stocks comes with unlimited risk. While it may seem to be a glamorous endeavor carried out by famous Wall Street tycoons, the risk is far too high for individual traders.

However, the concept for trading puts is still the same. We profit if the share price goes down, except our risk is limited to the cost of the trade.

That's why put options are ideal.

Here's how they work - and how we can use them to profit off of one of Wall Street's biggest clunkers...

How Put Options Work

Put options give the holder the right, but not the obligation, to sell a stock at a specific price - called the strike price - by a specific date. The option costs a small amount of money compared to an equivalent amount of stock. And if the stock does fall, the potential gains are multiplied.

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Let's say that a stock currently trades for $60 per share, and you short the stock. If the stock falls from $60 to $55, you make $5 per share, or 8.3%, minus commissions.

However, if you buy a put with a $55 strike, you might pay $1 plus commissions. If the stock falls to $55, you make $4 profit ($5 minus the cost of $1). That's a 400% gain.

Of course, that is a simplified explanation, and there are other factors involved. Still, you can see how much leverage you can get with options.

Most importantly, your total risk is what you paid for the option. If you short the stock, your risk is technically unlimited, as the stock could rise indefinitely.

That's why we're going to use the power of put options to profit from one of the worst stocks on Wall Street...

This Stock Is Heading Down - We're Profiting the Whole Way

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Finding stocks that are weak and likely to fall in price can be daunting. Fortunately, Chris' "Best in Breed" system can find both very strong and very weak stocks.

The one sector he's found has taken a beating - deservedly so - in both the market and in the media. That's the retail sector. How many malls do you see with half-empty parking lots and vacant storefronts? Traditional retail has been turned upside-down by demographics and by technology.

Some companies, such as Amazon.com Inc. (NASDAQ: AMZN) and Walmart Inc. (NYSE: WMT) have things figured out. However, many others have not, including Chris' bearish pick, American Eagle Outfitters (NYSE: AEO).

This apparel retailer's stock peaked Aug. 28, 2018, at $28.99, and it's been on a roller coaster downhill ever since. Now trading recently at $17.17, it has lost 38.9% of its value. Compare that to the S&P 500 making new all-time highs regularly this month.

AEO is lagging the market, lagging its sector, and sporting questionable fundamentals, but analysts still think it has further to fall. Wolfe Research predicts the stock could tumble another 44%, dropping to just $10 a share.

In other words, the trend is still down, and we see no catalysts to turn that around anytime soon.

That's good news for us. American Eagle is a great candidate to make a put-buying strategy work well.

Chris recommends buying AEO Sept. 20, 2019 $17 put (AEO190920P00017000). These puts are currently trading for $85 a contract, but Chris says they're still a buy up to $110.

If AEO continues its collapse, the puts could be worth double or even triple their cost right now.

But don't stop there. Chris has been on a hot streak...

Chris Johnson's New Trading System Unveiled

The stock market recently experienced its worst October since 2008.

But since late September, Chris Johnson has delivered a perfect 20-0 record in closed trades with the help of his brand-new Infrared Index.

And it's expected to continue to produce massive profit opportunities, like 157% in total returns in just 24 hours.

In fact, Chris has a new trade opportunity coming out tonight.

Click here to learn how you can take part...

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