Capture Profits in a Falling Market

Hello, Power Profit Traders!

In order for the Fed to curb inflation, Chairman Powell will need to break the labor department.

With another increase in interest rates this month, the path is set for the stock market, which will be a direct result of falling earnings.

How much time is needed to feel the full effects of increased rates is yet to be determined, but since the train is in motion, we need to acknowledge it and be proactive in taking opportunities when they come.

Learning how to incorporate put options in your portfolio may not only help with hedging investment portfolios, but I use them to take full advantage of short-term market swings and down trends.

Assuming no change in the labor force participation rate, every one percentage point increase in the unemployment rate can translate into 1.6 million jobs, said Mark Zandi, Chief Economist at Moody’s Analytics.

So, if the United States suffers a typical recession, with unemployment upwards towards six percent, it can translate to approximately 5 to 6 million lost jobs.

No Jobs

No Money

No purchases…

And we all know that fewer purchases simply trickle down to the bottom line of corporate earnings – especially when prices are higher in other areas of basic needs, such as food and electricity.

A downward revision to corporate earnings is not typically what investors want to hear. It screams the oppositive of growth and sustainability.

It speaks to a weakening world economy.

So, let’s talk put options.

Remember when you picked up an item in the store when shopping with your mother and she exclaimed, “Put that Down!”

This simple word association exercise will help you to remember that when you buy a Put, you desire the stock to go Down – it’s how you make money in a falling market.

Put Options

Like call options, puts are simply a contract that has rights and obligations associated with them. This contract has a market value, just like shares of stock, and the market value changes over time, and it will change as the underlying security rises or falls in value.

Learn about option terminology by clicking here.

When the going get’s tough, the tough buy put options!

There are a variety of benefits from learning to trade put options – below are just a few:

  • Hedge your portfolio – profit with put options as stock prices fall.
  • Leverage Account Funds – a single put can cost significantly less than 100 shares of a stock.
  • Invest a lot or a little in put options – the choice is yours.
  • Leverage returns – puts decrease or increase in value at a faster rate than the underlying stock.
  • Losses can be fixed to the amount of the investment, or even less when applying stop loss orders.
  • Make big profits when the stock market tanks!

The last bullet point item is critical to understand when preparing for a down turn in the stock market. There are ample opportunities with put options when the market tanks.

Historically, the market has proven that it can drop 20 – 50 percent during economic recessions.

As the Fed raises rates this year and economic news becomes dire, you can be prepared to take on trading opportunities as they come your way.

Join me at 12:00 noon this coming Monday, September 12, to find out how I’m taking advantage of the current market and economic situation.

See you soon,

Tom Gentile
America’s #1 Pattern Trader

Learn About Trading with the Money Morning Live Professionals!

Did you miss the Live session? Watch Tom’s replays!

Leave a Comment

View this page online: