{"id":103054,"date":"2017-03-08T10:15:04","date_gmt":"2017-03-08T15:15:04","guid":{"rendered":"http:\/\/countingpips.com\/?p=103054"},"modified":"2017-03-08T07:45:47","modified_gmt":"2017-03-08T12:45:47","slug":"if-the-trump-rally-reverses-heres-your-first-move","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2017\/03\/if-the-trump-rally-reverses-heres-your-first-move\/","title":{"rendered":"If the Trump Rally Reverses \u2013 Here\u2019s Your First Move"},"content":{"rendered":"
March 8, 2017<\/div>
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By WallStreetDaily.com<\/u><\/a> \"\"<\/p>\n

\"LouisEvery stock investor knows how to \u201cgo long\u201d on stocks.<\/p>\n

You buy shares of a company and sell them later \u2014 hopefully, for a profit.<\/p>\n

In other words: Buy low. Sell high.<\/p>\n

But few investors know that you can book serious gains on falling<\/i> stocks too. And even fewer people know how to do it\u2026<\/p>\n

Fear not, though. We\u2019ve got you covered.<\/p>

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Last week, Senior Analyst Jonathan Rodriguez showed you how to use options to supercharge your gains on stocks.<\/p>\n

Today, he\u2019ll show you how to use options to profit handsomely on a stock\u2019s downside \u2014 without shorting a single share.<\/p>\n

The strategy could come in handy if the Trump-driven rally cools off.<\/p>\n

Ahead of the tape,<\/p>\n

Louis Basenese
\nInvestment Director, Wall Street Daily<\/em><\/p>\n

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How to Book Massive Gains in Short Order<\/h2>\n

\"JonathanAs Louis mentions above, most people have a pretty good understanding of how to make money on stocks as they rise.<\/p>\n

But as you know, what goes up must come down at some point.<\/p>\n

And there\u2019s a killing to be made on stocks as they fall.<\/p>\n

You see, while stocks have a natural upward bias, when they decline in price \u2014 they often do so sharply.<\/p>\n

For instance, the S&P 500 rose 102% from 2002\u201307.<\/p>\n

But it took only 355 days for the index to lose more than half of its value during the financial crisis of 2008.<\/p>\n

So how does an investor play the downside?<\/p>\n

Most people would sell shares short.<\/p>\n

Short sellers borrow shares, sell them and hope to buy them back at a lower price \u2014 profiting on the difference.<\/p>\n

Not a bad way to play a stock\u2019s decline. But short selling comes with definite drawbacks.<\/p>\n

For starters, your maximum gain on a short sell is 100%. Meanwhile, your downside is unlimited.<\/p>\n

And though you may be right about a stock\u2019s direction, as famous investor John Maynard Keynes is said to have quipped, \u201cThe market can stay irrational longer than you can stay solvent.\u201d<\/p>\n

In other words, bullish forces can easily overpower the bears during rallies.<\/p>\n

So how can an investor capitalize on big drops in stocks without losing their shirt in the process?<\/p>\n

Simply put: with options.<\/p>\n

Last week, we covered the basics of call options.<\/p>\n

Now let\u2019s talk about using puts to get short \u2014 and get paid \u2014 at far less risk than short selling.<\/p>\n

Options 101: Put Basics<\/h2>\n

A put option is simply a contract that gives an investor the right, but not the obligation, to sell 100 shares at a certain price, at a future date.<\/p>\n

You\u2019ll recall that a call option allows an investor to purchase shares from the call writer at a set price and sell them at a higher market price if the underlying shares exceed the strike price.<\/p>\n

Well, a put option allows an investor to purchase shares if they fall below the strike price \u2014 and sell them to the put writer.<\/p>\n

There are three major advantages to buying puts to take the downside of a stock, rather than sell shares short:<\/p>\n

Advantage 1: Cost. <\/b>Just like call options, puts often trade at pennies on the dollar compared with their underlying shares.<\/p>\n

Advantage 2: Higher profit potential.<\/b> A short seller can make a maximum of only 100% on any given trade, and the shares have to drop to zero for that to happen. A put buyer, on the other hand, can easily make 100% or 200% on their options with just a few percentage points of movement of the underlying stock.<\/p>\n

Advantage 3: Limited downside.<\/b> Short sellers can suffer unlimited losses if a stock rallies. But a put buyer\u2019s loss is limited to the amount paid for the options.<\/p>\n

Let\u2019s take a look at an example\u2026<\/p>\n

How to Book a 100% Gain on a Double-Digit Drop in Facebook<\/h2>\n

Say you think shares of Facebook Inc. (FB) are overvalued. And you predict that the stock will plummet to $110 by the end of the year.<\/p>\n

You could simply short 100 shares. At current prices, that would run you about $13,685.<\/p>\n

If you\u2019re right about your hunch, you\u2019ll book a gain of about 20%.<\/p>\n

Not bad, but you could do much better\u2026<\/p>\n

The $115 put option expiring Jan. 19, 2018, would cost you $500 before fees ($5 put premium times 100 shares).<\/p>\n

That\u2019s a savings of 96%.<\/p>\n

Your option breaks even if the stock falls to $110 ($115 strike price minus the $5 put premium). And the put doubles<\/i> in value if the stock falls to $105.<\/p>\n

Better still, if the stock moves against you and rallies higher during the trade, you\u2019re only on the hook for the $500 spent on the put option.<\/p>\n

If you sell shares short and the stock rallies, you stand to lose thousands of dollars.<\/p>\n

As you can see, the advantages of buying puts over short selling are clear and numerous.<\/p>\n

Bottom line: There\u2019s a wealth of upside to playing down in stocks. And by using put options, you get far more bang for your buck \u2014 and you take on far less risk, too.<\/p>\n

On the hunt,<\/p>\n

Jonathan Rodriguez
\nSenior Analyst, Wall Street Daily<\/i><\/p>\n

The post If the Trump Rally Reverses \u2013 Here\u2019s Your First Move<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

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 <\/p>\n","protected":false},"excerpt":{"rendered":"

By WallStreetDaily.com Every stock investor knows how to \u201cgo long\u201d on stocks. You buy shares of a company and sell them later \u2014 hopefully, for a profit. In other words: Buy low. Sell high. But few investors know that you can book serious gains on falling stocks too. And even fewer people know how to […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-103054","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/103054","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=103054"}],"version-history":[{"count":2,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/103054\/revisions"}],"predecessor-version":[{"id":103066,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/103054\/revisions\/103066"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=103054"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=103054"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=103054"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}