Shorting With Options in Bad Markets is Simple and Effective
When the market turns bad prices go down and most investors or traders lose money. Although, the great investors and traders know that there are ways to make money in both good and bad markets. One of the best ways to make money in bad market conditions is by shorting stocks. This is where options come in handy, they make shorting a stock simple and effective.
Shorting with Options: Making Money in a Bad Market
When the market conditions are bad most stock prices should drop. In this case you don’t want to purchase (or sometimes not even hold) stocks. Alternatively you need to find a vehicle that makes you money as a stocks price falls. This is exactly what shorting a stock does. Shorting with options can be an even better way to do this.
Shorting a Stock with Put Options
One side of options are put contracts. When buying a put contract you pay a premium which is the max amount of money you can lose. Alternatively the profit is almost unlimited. You make money as the stock price falls below the strike price, the lowest it can fall is $0. Buying a put option is one way shorting with options works. This can be risky because you can easily lose the full premium you paid if the stock rises too much.
Shorting a Stock with Call Options
Another slightly safer way to mimic shorting (make money as stock prices fall) is by Selling Call Options. When selling a call you are paid a premium and are liable to sell shares of a stock at the strike price. You only have to sell the stock shares if the price of the stock rises above the strike price. This means like when shorting a stock, you make money if the stock price falls. In this strategy you have a limited profit which is the premium. You also have an unlimited loss because the stock price could rise indefinitely (same with shorting).
Shorting with Options: Protect your Portfolio in a Bad Market
When the market turns bad and you don’t want to sell the stocks you own, options can protect you. One way is to Buy Put Options on stocks you own as insurance. This way if the stock price drops the put price will rise and you should be able to limit your losses. Be sure to purchase as many contracts as necessary to cover your shares (100 shares/contract).
Alternatively another approach to protect yourself is to Sell Call Options on stocks you own. When selling a call option for protection you should own 100 shares of the stock per contract you sell. In this case you make the premium paid when you sell the call contract. As we explained previously, if the stock price rises above the strike price you have to sell the 100 shares of your stock at the strike price. This is where it is important to select a strike price above what you bought into the stock at. This way whether the stock price falls or rises you make money.
The great part of this is that you keep the premium no matter what. If the price drops you at least can mitigate losses with the premium. Also if the price rises you keep the premium and make a profit selling your stock. If you do end up having to sell your stocks this isn’t a bad thing since market conditions are bad.
Shorting with Options is Key to Success
Options are a powerful tool that every investor and trader should utilize to be successful. When the market turns bad prices drop and many investors and traders lose money. This is where the elite protect their portfolios using options and also make money through shorting and options. When you buy a put or sell a call option you are doing that. Use them to either make money or protect your portfolio. At YP Investors we want to provide you with the best Investing and Trading Strategies and Tools. If you haven’t tried our powerful analysis tools yet, sign up for a free trial here!