How to Profit on a Stock that Goes Down in Price

For some investors, it seems counterintuitive that you can make money on a stock that goes down in price. Those folks most likely haven’t heard about options trading or if they have, never pursued it to the point of understanding.

To illustrate my point, I will show you a Put trade, specifically a Buy Put (or long Put) trade on SunEdison (NYSE:SUNE). It was a Money Calendar Sell candidate that turned out well for us. This sort of trade is particularly relevant right now, as world markets post consistent declines.

I also explain this trade in greater detail in my training video below.

First, let’s look at the latest bearish signals for SUNE as depicted in the Money Calendar:

You buy Puts when you anticipate a stock will go down in price. When you buy a Put option, you have bought the RIGHT to “Put” or sell the stock to the marketplace at a specific price (the strike price) any time before or on expiration.

Example: XYZ stock is trading at $40 and you buy a $40 Put option for $2 (this is on a one contract basis, so the cost would be $200 for the option).

Next the stock goes down to $35. You have the right to “Put” or sell the stock to the marketplace at $40 when the stock is at $35. To do that, you would have to buy the stock at $35 and then exercise your right and sell the stock at $40, resulting in a $5 gain. This gain would be offset by the cost of the option price of $2, so you would gain $3 per share.

But we do not buy options to exercise our right on the stock.

When the stock is at $35, it would result in the option being considered “In the Money” or having “Intrinsic Value.” Think of it this way: The stock is at $35 and the $40 Put means it could result in a $5 gain on the stock transaction – it’s a “built in” profit potential of $5.

That $5 will be reflected into the price of the option, because options are comprised of two components that go into their price: Intrinsic Value and Time Value.

If the option you paid $2 for is now at LEAST $5 (not including any time value to make the math/illustration easier), you have a $3 gain on the option trade. Making $3 on a $2 investment is a great return!

Here is the action I previously showed for opening the SUNE trade:

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Plucking Ripe Profits from Apple

It’s a time-tested aphorism:  An Apple a day keeps the doctor away.  This week, we saw how properly timed options strategies came to fruition with Apple Inc. (NASDAQ:AAPL).

Can AAPL shares in your portfolio keep your account in good financial health?  I answer with a resounding “yes,” as would many investors who are happy with the way their AAPL shares have performed over the long haul.

But what about AAPL options?

Options traders also have benefited from this innovative high-tech stalwart.  Some have even made it a habit of trading AAPL daily (perhaps the saying should be changed to: “an AAPL trade a day…”).  After all, staying poised to trade support and resistance and other short-term technical patterns or signals is in their best interest.

Let’s be clear: I’m not here to make a day trader out of you.  Even for advanced traders, day trading requires considerable skill and nerve to pay off over the long haul.

That said, I want to show you the highly profitable outcome of a Money Calendar AAPL trade that I recommended on July 9.

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