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There's a famous saying when it comes to trading that goes like this:
"Bulls climb up the stairs and the bears fall out of the window…"
In other words, this means stocks often fall faster than they rise.
In fact, if you're not playing the downside, you're leaving big and fast profits on the table.
But you don't have to short stocks to cash in on this – there's actually a much better way.
And today, I'm going to show you exactly how to cash in on the bear and protect your wallet while you're at it.
Here's what I mean…
Play the Downside with Puts for Faster and Bigger Profits
Adding a bearish setup to your portfolio can be a very good thing and can lead to bigger and faster profits – if you know the right way to do it.
Now, when I say bearish, you'd might think that shorting stocks is the only way to go about it.
Shorting stock is done by selling the stock first and buying it back later.
Yes, your broker will actually allow you to do that!
For example, if you were to sell XYZ at its current price of $50 and buy it back later after a fall for $40, you'd make $10 per share or 20% profit.
Of course, your broker won't just let you sell something without risk in the game, so they'll hold the cost of the stock as margin in your account.
Trading stocks in this way, or any way for that matter, is great.
But as I introduced last week, there's a better way to play the market – and that's with the power of options.
Now, last week we used call options on bullish stocks to:
- Spend Less (Leverage More Stock)
- Reduce Risk
- Increase Profits 10-Fold
But I've got more coming your way…
This week, we're going to "put the battery in the other way around" and profit to the downside with put options.
Learn How to Trade Like the Pros: Tom Gentile just recorded all of his most lucrative trading income secrets in America’s No. 1 Pattern Trader Cash Course. This could set you up for life – and it’ll only cost you $1…
A put option provides you the right to sell a specific stock at a specific price (strike) until a specific date (expiration). Puts increase in value when the underlying stock moves down in price and vice versa. One put contract controls 100 shares of stock just like calls.
Puts are very much like insurance. In fact, they can be used to protect stock in the same way as insurance. But this insurance policy gives you the right to sell (put) the asset at an agreed to price for an agreed to amount of time.
On 10/9/18, the SPYs came up on my 10/30 Moving Average Crossover scan signaling a bearish move. (Now, you might recognize the 10/30 MA Crossover from past articles – so you can learn more about this by clicking here.)
If you were to short (sell) 100 shares of SPY at $287.48 on 10/9/18, you'd spend $28,748.
On the same date, a SPY January $286 put would cost $7.04 per share or $704 to control 100 shares of stock. This put option would expire on the third Friday in January, the expiration date.
Now, before we continue, let's look a little closer at the benefit of trading options in this scenario instead of buying the stock out right…
Point #1: Spend Less (Leverage More Stock)
Options allow you to leverage large amounts of stock for a lot less money. In this case, the puts are $28,044 (96%) cheaper than shorting the stock.
Point #2: Reduce Risk
About the Author
Tom Gentile is one of the world's foremost authorities on stock, futures and options trading.
With more than 25 years' experience trading stocks, futures, and options, Tom's style of trading systems and strategies are designed to help individual investors propel themselves past 99 percent of the trading crowd.