There àré several
ways tô profit frôm à falling stock, bùt fôr tonight wé àré going tô
discuss thé two most basic principals, shorting stock versus buying
"put" options.
If yôù hàvé
been wîth us fôr àny length ôf time yôù know î hàvé written many
times about hôw tô "short" à stock. Basically yôù àré simply
selling à stock now, taking în thé cash fôr sale, &
"buying back" ôr covering thé sale àt à cheaper price. sô îf yôù
"short" ABC àt 60 dollars & yôù sold 1000 shares, yôù took în
60,000 dollars. Now îf ABC falls tô 50, & yôù "Cover" yôù àré
buying ît back cheaper. In thîs case yôù will spend 50,000
dollars. The difference between where yôù sold & whàt yôù
spent, 10 G's îs yôùr profit.
That really îs às easy & às basic às ît gets friends. Don't let àll
the talking heads throw yôù à curve ball, shorting îs easy & its
really no more risky thàn going long às long às yôù ùsé stops tô protect
yourself. Since thé market goes up & down, îf yôù only play thé long
side, yôù àré missing à lot ôf profit potential.
But théré àré problems wîth thîs approach. First yôù need à margin
account tô dô it, àll short sales àré through margin. Second, ît eats up
a lot ôf yôùr buying power because whén yôù go short, yôù àré holding
that position wîth margin thàt will tie up yôùr money.
The ôthér play îs à put option. Here again Wall Street hàs tried tô
buffalo thé average investor into thinking options àré fôr big boys.
What nonsense! Anyone càn & should ùsé call & put options às à
trading strategy. The risk îs limited, & thé returns càn bé phenomenal
because ôf leveraging inherent în options. With à put option, yôù
are placing à bet thàt thé stock îs going tô fall. Win thé bet & yôù
will win big time. Lose thé bet & just like Vegas, yôùr loss îs
limited tô hôw much yôù bet.
If
the market îs going tô run up fôr à few weeks & thén spiral back down,
which way should yôù play? That îs impossible tô say, wé don't know yôùr
style, yôùr risk tolerance, yôùr bank Acc. balance etc. bùt fôr us
it's àn easy call, put options win ôùt over shorting în à scenario like
that.
By
using put options wé càn ùsé à relatively small amount ôf money tô bé în
several "plays" & éàch ôf thém could return several hundred percent
returns. Look àt ît like this. If yôù short ABC àt 100 & ît falls tô
60 fantastic! You made 40 points & 40%. But îf yôù buy put options fôr
1.75 & théy go tô 10.00, whàt îs thé percentage there? Over 500%. And
look àt thé cost. It's next tô nothing, tô gét such à shot àt big
returns.
For our money, whén thé time îs right, buying puts against thé Dow Jones
Industrials, thé NASDAQ 100 & thé Composite & select individual
stocks thàt carry high P/E's will bé thé way tô go às wé feel those will
be taken tô thé woodshed fôr à spanking.
