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We finished our second straight week of stock gains on Friday. Where we go next - well, it's not so simple in a market like this.
We haven't seen the last of the downturn, with all the uncertainty that will still weigh on markets.
We're still in bear market territory with more downside pressure ahead.
Don't let that scare you. In fact, a bear market is my favorite kind of market to trade in. Back in 2008, when markets fell 50% from their peak, I made $5 million in less than two years. So rest assured that a bear market isn't one without opportunities.
Trading is just one step in a solid bear market profit plan. Another is knowing which stocks to ditch, to keep them from dragging down your portfolio. Even if they're seeing rallies right now, it's likely those are short term with no real earnings or growth to support the gains.
But even considering that every single stock in the following list will head lower, with the power of options, you can expect to profit off a stock that is tumbling down, flying up, or stuck sideways...[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
Keep These Stocks Out of Your Portfolio
Before we get to the trade, here are the companies hitting my "stocks to avoid" list:
Live Nation Entertainment Inc. (NYSE: LYV): Live Nation is a company that sells tickets to sporting events and concerts. With sports being canceled and all concerts put on hold, you can imagine that this company has taken a hit.
Six Flags Entertainment Corp. (NYSE: SIX): All major theme parks are officially closed until further notice, including well-known landmarks like Six Flags and Disney. But unlike Walt Disney Co. (NYSE: DIS), which has content with the Disney channel and its streaming app, Disney Plus, Six Flags is a huge roller coaster park where tens of thousands of people go daily, so without a park open to customers - the stock is poised to head lower.
Kohl's Corp. (NYSE: KSS): Retail stores and restaurants are being hit the hardest right now. And that means major department stores like Kohl's are seeing their revenue impacted. In my eyes, the "light at the end of the tunnel" for retail stocks is far off - so, we can only expect this stock to move lower.
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Expedia Group Inc. (NASDAQ: EXPE): I personally have many Airbnb properties across the United States - so I am experiencing this one firsthand. We're seeing many people traveling less - including traveling for both leisure and business. As this continues, Expedia, an online travel company, will continue to lose revenue, and it's possible that it might also have to increase its customer service numbers. Neither of these things is a good sign.
MGM Resorts International (NYSE: MGM): A location where masses of people congregate to gamble is obviously being impacted by the coronavirus. When China was shut down, Macau - the casino capital of the world - was at a 2% occupancy rate. MGM is likely to follow suit, leading to an unimaginable hit in revenue or even a possible shutdown, depending on how long this situation lasts.
Uber Technologies Inc. (NYSE: UBER): This stock rallied recently because it said that its Uber Eats business has been strong in the last couple of weeks - but I'm not sold. Business for drivers has been slow due to most people not leaving their homes.
For example, if you were to buy options on Uber, you could pay $5.75 per order, and even if you were to increase the number of orders, that just means that you're losing more money.
Eldorado Resorts Inc. (NASDAQ: ERI): This is another big destination spot that we're adding to our list. With the travel decline and an increasing number of cancellations, this is a stock looking at a downturned climate for the foreseeable future.
Marriott International Inc. (NASDAQ: MAR): Another travel company, another stock to avoid. With hotels having a huge overhead and needing to stay open despite their low occupancy, they have no other option than to continue to burn through cash.
Nordstrom Inc. (NYSE: JWN): Nordstrom is another major brick-and-mortar retail name that will continue to lose money as its rent stays very high and the revenue falls lower. Combine this with the fact that consumer spending will be down, and it makes this stock another possibility for going out of business.
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Simon Property Group Inc. (NYSE: SPG): This is not a retail name, but it's a group that owns the actual malls themselves. Malls have been struggling to flourish for some time, but with the almost complete lack of customers entering their doors, I only expect to see this stock move lower.
Now that your portfolio is clean, here's how to make money on a stock that's going down...
How to Profit Off a Tumbling Stock Using Options
For this opportunity, I'm going to use a stock from our list - JWN - as an example. While the company is dealing with the effects of the pandemic, you can easily set yourself up for a nice profit by doing the following:
- Look at least three months out.
- Look to buy a put spread that is 25% of the value of the spread. (A put spread is an options trading strategy that consists of buying higher-strike puts and selling lower-strike puts simultaneously. For details on how to execute a put spread, go here.)
- JWN July 17 2020 10-7.5 put spread is $0.60 debit. So I could buy the 10 puts and sell the 7.5 puts for $0.60 debit.
If JWN goes to $5, I can make $2.50-$0.60 or 300% profits; if JWN goes higher, the most I can lose is the price of the spread.
This possibility of profit and the management of risk is why options are so powerful during uncertain times. They'll also offer your portfolio a nice cushion when we enter bear market territory again.
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About the Author
Andrew Keene is a globally known trader and a renowned expert on all things options.