Buying put options is a great way to pocket gains when you expect a stock is going to move down.
Just this past week my Weekly Blitz Alerts service capitalized on weakness in American Well Corp. (NYSE: AMWL). Thursday saw the stock’s second 8% drop this week. That helped our May 21 $12.50 puts more than double from our entry.
Puts are also an effective way to manage your risk in a position by limiting your losses to 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 like we’ve had this week…
But those are the exact conditions traders will be paying top dollar for downside exposure.
Put options can help one’s portfolio when bad things are happening in the markets.
And to help you understand that, think about the situation 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. Why? 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 first sells a call option. Then they buy a second call option with the same expiration date, but a higher strike price.
And the strike price of the call sold is lower than the call bought. That way, 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 and limited reward scenarios. And that can help keep trading accounts moving in the right direction when markets aren’t.
Check out my short video below and let’s talk about different ways traders can improve their success by buying put options.
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P.S. What should traders do when stocks aren’t going up?
Back in the 90s, people used to think the only way to rip cash out of the market during flat periods was dividends…
And many still believe that…
But what if there was a way to make 30%, 50%, even double the investment when the markets don’t even move?
Thanks to a little-known “millionaire’s” secret… we’ve found these profit pockets in stocks that can pay double-digit returns even when the market is STUCK!