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Dear Red Alert Reader,
Many investors believe that when the stock market falls, everyone loses money. That's simply not true.
In fact, for the smartest traders, a downturn is just another opportunity. The trick to making money when markets fall is options trading.
We're going to show you exactly how to do that today as the Dow Jones has plunged 6% this week as coronavirus fears rise. We're going to make money here by targeting one sector we think is going to take the worst of this turbulence.
Money Morning Quantitative Specialist Chris Johnson thinks the banking sector is heading for an even bigger fall.
Actually, he calls it a "looming collapse."
Earnings weren't that impressive, he said, because they merely met expectations that were already beaten down. The outlooks weren't strong, and interest rates are starting to roll over, which will take some money away from banks.
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When you want to buy stocks, you look for the strongest stocks in the strongest groups. The reverse is true for when you think they are going to drop in price. You want to sell the weakest stocks in the weakest groups.
Bank of America Corp. (NYSE: BAC) surely fits that bill.
Just one look at the stock chart, and it is easy to see that BAC is nowhere near its February highs like the major indexes have been. In fact, this week, the stock traded about 3.5 points above its March low and more than 14 points below its February high. Basically, the stock has been treading water since April.
It is not alone, either. The entire financial sector and banking subsector is the weakest of all sectors after energy. That is a very low bar to beat, too.
There is no real reason to buy banks and other financials, at least not in a broad-based way. The fundamentals and technical indicators are lined up against this company.
That's why Chris thinks it is about to get a haircut, especially as broader markets are tumbling too.
This is a great profit opportunity on its own. But if you're focused on making money when stocks go down or hedging your portfolio during a volatile market like this one, then this is how to do it.
Here's how to make a put options trade on Bank of America to profit as stocks tumble…
How to Use Options to Make Money When Markets Fall
You could short BAC, but that comes with unlimited risk.
Rather, Chris says buying put options on BAC is the way to go.
Here's Chris' options play:
Buy to open BAC Jan. 15, 2021 $25 put (BAC210115P00025000) using a limit order of $2.40 or less.
That means buying a put expiring in January with a strike price of $25. With the current traded price of Bank of America stock near $23.50 following this week's market-wide selling spree, this option is also in the money. That means the strike price for the put is above the stock's price.
Important: This strategy could help you make your portfolio “recession-proof.” Learn more.
This is important because while the option costs more than an out-of-the-money put, it tends to move faster because it has more intrinsic value than "hope" value. Even if the underlying stock did not budge a penny, when the option expires, it will still have some value.
Chris' target price for the stock is $21 to $22 per share, or about a 10% drop. That's not much for an individual stock in that price range.
Don't forget, your risk is limited to the $2.40 or less you paid to purchase the option.
No matter which way the market moves – or doesn't move – the right options strategy can make you some good money.
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