How to Profit in a Down Market

You are receiving this email because you signed up to receive True Market Insider. Unsubscribe Keep the emails you value from falling into your spam folder. Whitelist True Market Insider. Forgot your login information? Click here. How to Profit in a Down Market Many professional traders, stockbrokers, hedge fund managers, and individual investors find it difficult to go negative on the market. However, folks who make money are the ones who realize that the market can trade both up and down, and then act on it. After all, even in an up-trending market, it's possible to make money on dips and short-lived downturns. So, how do you profit from a market that may be heading south? First, you reduce your exposure by selling part of your long portfolio. Second, you can short stocks or buy "in the money" put option contracts. The put option contract gives you the right to sell your stock at a designated price by a designated date. But most of the time, people don't actually use the put option contract to sell stock at the designated price. Instead, they typically sell it to someone else without any stock transaction taking place. This is similar to the way a futures contract is traded. A futures contract represents someone's intent to buy sugar, for example. If the price of sugar goes up, the investor would most likely sell the futures contract at a profit, rather than using the futures contract to buy a truckload of sugar and then trying to sell it to the local grocery store. Most people will tell you that trading options is a very risky strategy. Well, that all depends on how you approach the strategy. You see, I actually use options to control and reduce my risk. When you sell a stock short, you have unlimited risk. In fact, you can lose more money than you had invested in the trade! The mere fact that there's that much risk involved tends to steer investors away, keeping them from profiting in a down market. You may be thinking to yourself: "Couldn't I just limit my downside by implementing a 'stop loss,' (an agreement to close out a position, in this case, and buy the stock back at a pre-determined price) with my broker?" You could, but there are two problems with that line of thinking... ========Recommended Link======== TEN YEARS OF PROFITS Join us for Costas Bocelli's 10th anniversary event and find out how you could "write your own paychecks" with this strategy used by elite traders. More Info... PROBLEM #1 The "stop-loss" automatically triggers once the stock hits, or trades, through a certain pre-determined price. For example: Let's say that the stock you've shorted closed at $43 and you have a stop-loss order to buy it back if it trades at or above $45. However, after the close, the company announces some huge deal that causes the stock to open on Monday at $100. Since the opening trade on Monday is at $100, the next trade will probably be the price at which you cover your short. You've then lost $55 per share... which is more than you thought you were limited to losing! And if you shorted the stock on margin, both you and your broker are going to have a very bad day. PROBLEM #2 Even if that fluke doesn't occur, what if you've shorted a stock at $40 in the hope that it trades down to $25, and you put in a stop-loss order to "cover your short" (buy the stock back) at $45, in an effort to limit your downside to 12.50%? The downside here is that your stock can trade up to $45.15 and you will have automatically bought the stock back and taken your loss. It's never fun to then watch the stock trade down to $25 like you thought it would, when you don't realize the 15-point profit because you've closed out (or "covered") your short position at $45.15. Now, let's assume that you're willing to risk the 5 points ($5/share) if you knew that would be your MAXIMUM loss when shorting the stock. Well, when you own the right put option on the stock, you're risking about the same amount that you were willing to risk when shorting the underlying stock. But with a put, you know that your maximum loss is about 5 points. Example: Suppose the stock climbs to $45 and then keeps on climbing further to $49. You can still stick with the put position, as your risk is predetermined. As a matter of fact, chances are that if the stock traded to $49, your puts would still have some value. If the stock swings up to $49 but then drops down to the original price of $40 again, you'll be able to recover almost all of your original investment. If the stock then swings down to $25, you'll realize your profit. So the benefits are that you know for a FACT what you're risking (unlike when you use a stop-loss order on a stock,) and you may be able to profit, even if the stock swings the wrong way before heading in the direction you wanted it to. Once you're familiar and comfortable with buying put options, it could help preserve your portfolio in a down market, with far less risk than short-selling stock. In a future article, I'll share three rules on how to identify the right put options for your stocks. Trade safe! Chris Rowe True Market Insiders P.S. My longtime friend and colleague, Costas Bocelli, has been sharing quick-profit trades with readers of his Profit Skimmer service nonstop for the past 10 years. To celebrate his 10th anniversary, Costas wants to make some of his hottest trade ideas available to you—absolutely free. Click here for details. 150% In Just Days Bring in an extra $4,928 a week… even if you only have a few hundred dollars to start. CLICK HERE RECENT STORIES Want to Make Consistent Money in the Market? The Most Accurate Indicator You've Never Heard Of The Best Traders All Have This "Superpower" Before You "Double Down" on a Losing Stock, Do This Instead… Copyright  ©   2020  True Market Insiders, All rights reserved. Our mailing address is: 33 SE 8th St, Boca Raton, FL 33432 Want to change how you receive these emails? 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