Make Money on Falling Stocks

There is no hiding the obvious: The Fed's actions are a huge deal in the eyes of Wall Street, as lower interest rates are seen as good for stocks. After the Fed released its minutes on Feb. 20 showing its apparent commitment to further interest rate cuts, the market came off early losses to finish up for the day. Yet stocks tumbled down for the majority of the following two days before rallying late on Friday, Feb 22.

It's amazing how Fed minutes -- a document that we already have a general idea of what it contains -- can impact the market, good or bad.

As options players we have the distinct advantage of playing either side of the market. That's why options trading is one of the greatest games on earth -- you can be the investor, betting on the action of stocks, or you can be the "house" (i.e., the bank), taking the bets instead of making them.

You pick the role and have the fun (and profits!). With options, gains of more than 1,000% are not unusual, and you can design strategies that will win up to 90% of the time.

Considering that the markets will go up nearly as often as they go down, ensuring that your strategy allows you to profit 90% of the time means incorporating put options, which let you capitalize on downside movement in a particular stock, sector or the overall market.

'Put' Your Money Where Your Faith Isn't

Because the markets are so challenging to predict, let's zero in on a more-manageable trading approach: determining whether a specific company's stock will go up or down. In particular, when would we want to establish a bearish bet on a company? Here are some of the signs to look for:

* A lackluster product line -- In the fast-moving tech world, for instance, if a company's competitors are infiltrating the market with newer, better, faster and sleeker items, the brand may fade from customers' radar.

* Lack of potential success -- You may notice that the FDA gives "fast-track" status to certain drugs in development and assists the manufacturers in meeting its guidelines for bringing a drug to market. Other companies are making drugs that are considered high-risk and whose data seems to indicate that the therapies might hurt more patients than they help. Also, take note of the companies that the FDA requires more information from, thus delaying the drugs from coming before an FDA advisory panel for review, let alone approval.

* Poor management -- If you read news articles and press releases and get the perception that a company is poorly run because of high turnover in the top brass or due to a series of bad decisions, these aren't necessarily problems that can be fixed in a short amount of time.

There are many other signs that a company's stock is set to hit the skids, but once you do identify a potential loser, you have a unique advantage as an options trader because you can buy put options as a bet that a series of unfortunate events will result in a stock taking a tumble. And that's a move that can bring you big profits!

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In his Fast Options Profits service, Ken provides two options trades per week, complete with Buy Under, Target and Sell Stop prices. Click here to try out Fast Options Profits risk-free and see what he's recommending next!

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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!

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