Now that the bear market is official, the question on every trader’s mind is whether they should start shorting stocks right now.
Short answer: You should try options trading instead.
Here’s why.
This is a double-edged sword, because nobody knows when an actual bottom will form. A 20% loss can turn into a 30% or 40% loss over the coming weeks and months. On the other side, the sentiment to “get out” generally peaks right at the bottom, and we can practically cut the bearish sentiment and fear out there right now with a knife.
So, no matter what your opinion on the stock market may be, betting the farm on lower prices by shorting stocks is exceptionally risky right now. You could be right and make money. But if you are wrong, things won’t go so well.
Fortunately, there are options trading strategies that let you profit on the downside while controlling risk.
You can buy put options to profit from any further declines in stocks while only risking a fraction of the money you would by shorting stocks.
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Too good to be true? Well, actually it is a time-tested way to make money in a down market. We’ve got a pretty good track record of making some sizeable gains for our readers using puts since the coronavirus started, including a 1,000% gain on Carnival Corp. (NYSE: CCL), a 340% gain on Marathon Oil Corp. (NYSE: MRO), and a 400% gain on JPMorgan Chase & Co. (NYSE: JPM). This can be a huge opportunity.
But there is a catch. Right now, with market volatility so high, the price, or premium, you have to pay to buy puts is rather pricey.
Nobody Makes Money Running with the Herd
Being bearish these days is the consensus view, and nobody ever made big money doing what everyone else is doing. So, while you may think there is some more downside here and want to capture it, that’s fine.
But what if the panic we’re seeing these days is overblown? This is not to say the pandemic is false, but rather the stock market’s reaction suggests the end of days is upon us. While the virus is absolutely a concern, there are still prudent decisions investors can make to profit.
Yes, in this case, we’re talking a slightly contrarian options strategy. What if we dipped a toe in bullish water while everyone else was bearish? We’re not saying you should dive in with fistfuls of cash, but we can still make money when few people are looking.
With self-quarantining encouraged, public gatherings getting canceled, and even the NBA suspending its games until further notice, people are going to be spending a lot more time online.
Students will take their classes on their devices. Everyone will be looking toward streaming services for entertainment.
And you can profit from that trend with a quick options trade...
A Bullish Play in Bearish Times
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Money Morning Quantitative Specialist Chris Johnson likes using options to limit your risk. Specifically, he likes a call on online retailer Etsy Inc. (NASDAQ: ETSY).
Etsy operates two-sided online marketplaces that connect buyers and sellers globally. Small entrepreneurs can reach customers in ways they could not have done before. And buyers will find many non-mainstream goods that they otherwise could not have found.
The stock was humming along nicely this year, up more than 30% before the market imploded. It is now back to December levels.
It’s the proverbial “baby with the bathwater” decline, because if businesses do suffer and people avoid public places, the online world will be the only game in town in which to work and to consume.
Chris still expects it to climb another 20% to 30% in the next few months, framing a prime window of profits both for the long and short term.
There you have it. A small play if you are bearish and a small play if you want to buck the crowd and get in before the rest of the market calms down.
Action to Take: If you’re still a contrarian in today’s bull market, you still have profit potential. Here’s an options play you can watch if you have the right risk tolerance: Chris Johnson recommends a $60 call on ETSY to expire June 19.
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