Buying put options is a great way to pocket gains when you expect a stock is going to fall.
Just this past week, my Daily Profits Challenge and Weekly Blitz Alerts strategies capitalized on weakness in HP Inc. (NYSE: HPQ). Friday morning, the stock gapped down 5%, landing us a nice payday with over 50% wins for members of both strategies!
Puts are also an effective way to manage your risk in a position in the underlying stock by limiting your losses from a downward move.
Of course, there’s a time and place for everything…
So it might seem like the right time to buy put options is when there’s a series of down days in the stock market…
But those are the exact conditions traders will have to pay top dollar for downside exposure. And no one likes paying top dollar…
Buying Put Options in a Volatile Market
Put options can help one’s portfolio when the market outlook is grim.
And to help you understand that, it’s best to think of a put option like an insurance policy for when things turn south on Wall Street.
If the insurance salesman thinks there’s a good chance they’ll have to pay out, they’re going to hike up your premium because demand for their service is about to skyrocket.
I’ve discussed in the past how traders can participate in both upward and downward trends with the use of option spreads when implied volatility (IV) is high.
For example, you could use a bear call spread instead of buying put options when IV is up. To set up this strategy, a trader sells a call option and buys a second call option with the same expiration date, but a higher strike price.
And because the strike price of the call sold is lower than the call bought, the premium from the sold call is always greater than the cost paid in the second leg.
These kinds of options strategies offer excellent limited-risk, limited-reward scenarios that keep trading accounts moving in the right direction when markets aren’t.
Check out my short video below and let’s talk about some of the different ways traders can improve their success by buying put options to bank on a downward move.
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P.S. Chuck Hughes is a former Air Force pilot turned 10-time Trading Champion and million-dollar investor…
And his brand-new discovery, Omega One, was triggered on SMH…
Spitting out a perfect 0.01 rating.
To see how this “0.01” signalled a healthy 107% profit opportunity…