I've long advocated that investors who don't trade both sides of the market are giving up half their profit potential – possibly more – because they're thinking only in one direction.
Problem is that stocks can and do go both directions.
Take Apple Inc. (Nasdaq: AAPL), for instance.
The company reports after the bell today, and I think earnings will probably be good. Generally speaking, I think sales figures will be in line with expectations and that and service revenue will probably be an area of significant growth, something I noted Monday during an appearance on FOX Business Network's "Varney & Co."
It's the guidance that concerns me.
Rumors are flying that the company may be facing delays with regard to the release of the iPhone 8. There are also concerns that the company is losing global market share stemming from a loss of innovation.
I can't say I disagree.
Those are valid concerns; to my way of thinking, Apple now oozes MBAs instead of the dynamic thinking and product development that it used to.
What I want to see is more emphasis on the "ecosphere" we've talked about so many times in the past. And if that doesn't materialize?
That's why I'm writing to you today on a Tuesday ahead of the company's earnings instead of our usual Wednesday delivery slot. I want you to have the chance to profit from anything that spooks the markets if Apple upsets the apple cart, so to speak.
To be clear, I don't think Apple is going to fail, so what I am talking about here is a short-term trading opportunity that balances out the longer-term investment perspective the company merits.
By its very definition, that means you treat the trade I am suggesting today as a speculative trade with a 24-48 hour window. That also means you do not use money you can't afford to lose, and that you confine total dollars committed to the trade to 2% of available capital or less in keeping with proper risk management.
So, What Do You Do?
There are a lot of ways you can profit when the markets, or even specific stocks like Apple, change direction. In fact, the menu of choices makes ordering designer coffee seem positively simple. There are shorts, leveraged inverse funds, spreads, derivatives, and futures contracts with all kinds of exotic names (though most are simply ways to separate you from your money).
If you want simple protection you can almost "set and forget" as an investor, consider buying a fund like the Rydex Inverse S&P 500 Strategy Inv (RYURX). It's an inverse fund that tracks the S&P 500 and rises 1% for every 1% the index falls.
Studies suggest that having 2%-5% in a choice like it can not only dampen overall portfolio volatility, but hedge the income stream and principal value of your investments at the same time.
I'm suggesting this as a means of giving anybody who doesn't "do" options a means of playing along. And believe me, you'll want to if Apple does anything less than knock it out of the park.
The company carries a $776 billion capitalization and is one of the most widely traded securities in the world, so it has the potential to move the markets.
But if your goal is quick profits, you're options savvy, and you're more aggressive, I believe you can get the biggest bang for your buck – and take on the least risk – buying cheap, out-of-the-money put options.
Buying puts is one of the most conservative options strategies there are.
The Best Way to Profit from Short-Term Dips
It's basically a bet that prices will go down by a certain amount within a certain time frame. They're a great tool because put buyers profit as the underlying stock or index falls. That's what makes them a great tool for reversal trading, especially now with the markets in nosebleed territory and a stock like Apple is rumored to deliver something "surprising."
Keep in mind, reversals are very, very rarely anything more than a short-term adjustment, and that's precisely how you should consider trading this one. If your core portfolio is lined up with an appropriate mix of unstoppable global trends, then allocating a portion of your money to profiting from them is logical in the pursuit of higher profits.
Contrary to what people believe, trading reversals successfully is not about timing. It's more about picking logical points at which the markets will be stressed. Like Apple could be.
If you want to play along, here's what I suggest.
About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.