In a Soaring Market, Downside Protection Is Cheap (and Very Smart)

It sure seems like these markets can keep going up and up forever; the Dow blew right past 22,000 on Aug. 2 - its sixth consecutive record day, no less. And this comes on top of July shaking out to be the second-best month on the Street all year.

Beyond the usual crowd of permabears, you'd be hard-pressed to find too many voices calling for a correction or crash. Some of them have been calling for a crash since Election Day – Ronald Reagan's Election Day!

Still, there's a certain quiet apprehension out there among economists, big fund managers, and analysts, according to a recent CNBC Fed survey.

Now, stocks very well could go higher, 10% or maybe even more once tech gets its mojo back. But there are two very good reasons to prepare for a dip of some kind.

No. 1 is simple: It's your money, and it always makes good sense to protect it. "Prepare for a rainy day."

No. 2 is probably the most compelling reason: When markets are heading higher the way they have been, "insurance" is "on sale."

Remember, nothing goes up forever, even if it may "want" to, so let me show you the best way to do that right now.

The Power of the Put in a Stock Market Crash

There are two solid strategies you can use when the markets fall: a long put or a put debit spread. They're both extremely powerful in the event of a market crash - and they're both extremely easy to use.

Let me show you by using a case study on Clorox Co. (NYSE: CLX)...

CLX reports earnings before market open (BMO) on Thursday, Aug. 3. Judging by the last four earnings sessions and the performance of the stock over the four days prior to the announcements, CLX has traded down for an average move of 1.5% in the three of the last four quarters. That tells us that there's a greater likelihood of the stock falling again before Thursday, which is why a put or put spread are your best considerations.

Below is an example of a long put on the stock using a CLX Aug. 18, 2017, $135 put:

And this is an example of a put debit spread using a CLX Aug. 18, 2017, $135 put and a CLX Aug. 18, 2017, $130 put:

Both of these trade ideas will turn a profit when the price of the stock goes down.

But here's the difference...

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The long put costs $3.03 (or $303, since one contract equals 100 shares), which is a little more than the debit spread. This is because you are only buying one option instead of selling another option with the same expiration, but at a different strike price, to offset the cost of the long put. Now this is the disadvantage of the put, but the trade-off is your substantial upside profitability, with the possibility of CLX trading down to zero (albeit extremely unlikely).

Tom Gentile is known as America's No. 1 trader, and for good reason. Since 2009, he's taught over 300,000 traders his option trading secrets, including how to find low-risk, high-reward opportunities. Now he's sharing that insight with you. To get started, just click here – you'll get Tom's twice-weekly Power Profit Trades delivered directly to your inbox, free of charge.

The put debit spread costs less, at $2.03 (or $203) per contract, which is what you bought the put for, offset by what you sold the other put for. And if you look at cost as risk, the maximum risk in this trade is less than that of the long put. That means you have less risk and, therefore, less profit potential. With the long put, CLX can drop to zero - putting you all that many points in the money, which could be reflected in the price of the options.

With the put debit spread, the most you can make is the difference between the strike prices ($5.00, or $500 per contract), which is offset by the cost of the trade ($2.03, or $203). This makes the most you can make on this trade, even if CLX dropped to zero, $2.97, or $297 per contract.

But that still gives you a 146% profit. And in order to realize that profit, CLX must be trading under the strike price of the option you sold ($130) at expiration so that the markets exercise the right to sell you the stock for $130. When that happens, you can exercise your right to sell it at $135 - giving you that $500 difference offset by the $203 price per contract.

Ultimately, a put debit spread could cause you to sacrifice some upside earnings potential, but you've got a higher probability of success on the trade compared to simply buying a put. In the case of a put, you won't be sacrificing that upside earnings potential, but you are sacrificing the lower cost.

No matter what you choose, you've got a surefire way to make some money if and when the markets crash.

Of course, the trades I used above are not actual recommendations. So be sure to speak with your broker before employing either strategy.

The Gains Are Both Big and Fast: Just take a look at how quickly readers can bank their profits. Total gains of 277% in five trading days, 269% in six trading days, 221% in two days, and 297% in 24 hours. That's good enough to turn $500 in each trade into $11,855 cash a few days at a time. It's the fastest legal way to make money we've ever seen. When anything makes this much money, there's a limit to the number of readers who can see all the details. See how it all happens right here

The post Economists Just Warned a Major Market Correction's Coming - Here's How to Prepare appeared first on Power Profit Trades.

About the Author

Tom Gentile, options trading specialist for Money Map Press, is widely known as America's No. 1 Pattern Trader thanks to his nearly 30 years of experience spotting lucrative patterns in options trading. Tom has taught over 300,000 traders his option trading secrets in a variety of settings, including seminars and workshops. He's also a bestselling author of eight books and training courses.

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