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Make Money on Falling Stocks

By Ken Trester

Options Can Earn -- and Save -- You Money

Buying put options is a great way to profit from stocks. Rather than plunking down a significant cash outlay to buy shares, you can instead make some profits while you wait for the stock to fall to a more-favorable price where you'd be interested in buying it.

Whether you anticipate a stock's fall will be temporary or you foresee a long slide ahead, you can ride a stock to the downside through the purchase of put options.

When stocks close higher for the day, especially after a downdraft, you can bet that lot of traditional short-sellers will scramble to cover their positions -- or, if they already did, it can explain some of the upward movement in stock prices.

Short-sellers are traders who "sell to open" shares of various stocks in hopes that the stocks would drop and they could buy back shares (or cover their short positions) at a lower price, thus resulting in a profit.

But if they perceive a stock to be going up -- or they see it rising -- they "cover" at the first-available price they can get, just so they don't lose any more money if shares keep going up.

A trader's losses can be unlimited when he or she establishes a short stock position. But when you purchase a put option, you define your risk from the outset. Buying a put option is as easy as buying a call option, and your risk is the same -- you can only lose what you pay for the option, nothing more.

Put options allow you to ride a stock to the downside and they give you the right, but not the obligation, to "put" shares to someone who had decided to sell to open a short put option position.

Like a call option, a put has a limited lifespan and it may expire before the stock makes the move you are anticipating. While you will take a loss in such a case, you know what the maximum potential loss is before you even add the position to your trading account. And while a loss of any kind is never a comfortable thing, a small, defined loss is a lot better than a big, potentially unlimited one!

You never know when the market might suddenly catch a bad case of the chills. And you certainly want to be in the game and ready to profit when it does. Buying put options is the least-risky way to do just that.

In Fast Options Profits, I provide a balance of call and put recommendations to ensure that you are positioned to benefit from stocks on the move, whether they're going up or down. Get two hot-off-the-presses options trades every Friday -- click here to join today!