Put Options For Down Markets By Jason Ng At Isnare.com Ezine Articles

The worst recession and stock market crisis of recent history hit the world late in 2007, taking the Dow Jones Industrial Index down from a high of 14000 points in October 2007 to about 6400 points in March 2009. Yes, more than 55% of stock market value evaporated over a period of slightly more than a year. Funds closed down and traders when bankrupt. This is the hardest market crisis in recent history and will certainly go down history as one of the most important.

How did your trading account do during that period of time? Did your account value collapse like most of the others? Did you lose more than 70% of your account in just one year? If so, there are millions of people just like yourself out there.

However, there is a small elite bunch of traders who not only did not go bankrupt but made significant profits during that period of time! No, they were not one of the big banks in wallstreet neither are they big time government officials with access to “secret information”. They are normal everyday folks like you and me. The only difference is that they knew how to control risk and make money during big down markets using one simple financial instrument that so many have heard of but so few ever learnt. Just one financial instrument, combining the power to profit explosively during down markets and the risk control measures to prevent catastrophic losses. No shorting of stocks or futures needed that exposes you to unlimited loss and margin calls. What is it?

That financial instrument is Put Option.

Put options are so simple in its logic but produces the exact right combination of effects for big down markets. It not only allows you to make a profit from down markets but also protects you and allows you to control your exact risk exposure! That’s right! Put options are the safest way to profit from a down market EVER.

The problem with the other two methods of profiting from a down market; shorting stocks and shorting futures, is that both methods exposes you to unlimited risk as well as margin calls! That’s right! They lack the risk control mechanism that is so important to profiting in volatile bear markets like the one we just went through. Are you going to go through the next big volatile bear market by exposing yourself to unlimited risk again?

So, what are put options?

Put options are contracts that allows its holder to sell the underlying stock at a fixed price no matter what price it is in future. You pay a small fee to own this contract and all you can lose if the market should suddenly go up instead is just that small fee you put towards buying those put options! Nothing more! You risk nothing more than what you are willing to risk in the first place! When you short stocks or futures, you keep losing money as long as the market continues to go up against your favor. That is not the case with put options and why it is such a good financial instrument for speculating in an uncertain, volatile bear market! See?

Since Put Options allow you to sell a stock at a fixed price no matter what price it is in future, its value increases as the underlying stock falls. For instance, if you buy a put options on a stock that is trading at $100 now at the strike price of $100 (which is the “fixed price” we mentioned earlier) and the stock drops to $80, the put options will be worth $20 since you still have the right to sell the stock at $100 when it is now $80! See? How much does that put option cost? Probably about $1 to $3! Yes, small commitment for big return! That is the leverage power of options trading. Now, what if the stock rallied to $200 instead? Well, all you lose is that $1 or $3 you put towards buying the put options, nothing more! If you have shorted the stock itself, you would have lost $100 when the stock rallies from $100 to $200! That’s the risk control mechanism of put options. As such, you should always buy put options only with money which you want to put at risk. For instance, if you have $10,000 and wants to put at risk no more than $1000 at a time, then $1000 is all you should use for the purchase of put options.

Do you want to be geared for the next big volatile bear market? Yes, it will come again, no doubts about it. When it comes again, will you be ready with put options to profit safely and consistently? Learn how to profit from Put Options now at http://www.optiontradingpedia.com/put_options.htm .

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