How to Profit from a Falling Stock Market

Days like today remind me as to why I am glad I have developed some skills in options trading – because let’s face it: if a low capital day trader like me didn’t have access to put options how on earth would I be able to make money on a delicious down day like today?

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Making Money with Put Options

A number of investors tend to think of using put options as a means of insurance on existing asset / security positions. This only makes sense given that picking up a put contract can yield handsome profits should asset prices fall fairly quickly. One might thing that figuring out when asset prices are likely to fall is the hardest part about investing in puts but that isn’t as hard as you might think. What is difficult then, is having the discipline to pick up a few contracts when the timing looks good.

Why Everyone Should Invest in a Few Put Options

Seriously, this is not rocket science. Think about your available investment assets today. You probably have some stocks, maybe some mutual funds or ETFs. You almost certainly have a 401K and or an IRA retirement account. What is the problem then? What is the weakness in your investment strategy? Easy. All of your positions are most likely longs. Some of you may even have 6 or 7 figure retirment accounts today. Are all of your positions tied to long positions in risky assets? I don’t care whether you have long positions in bonds, stocks, currency, or commodities today – because virtually all asset prices are held up by the massive quantitative easing done by the world’s central bankers. If you don’t have at least some exposure to an effective short position like a series of long-dated puts then your entire nest egg is completely exposed to global macro risk. As you well know, macro-risk events are a principle area of interest for this blog.

We’ve spent years studying these sorts of phenomena, and if you haven’t already, I strongly urge you to pick up a copy and read The Black Swan by Nassim Taleb.

How I Can Smile During a Falling Stock Market

One might think that I would be aghast at the falling stock market today, but I am not. I am smiling, because I saw the risks coming at the same time I saw opportunity knocking. Stock market highs? Check. VIX lows? Check. Global volatility indicators increasing? Check. Wool coming off the eyes of Fed policy makers? Check. What does these signs all tell me? Buy puts. Long-dated cheap deep out of the money puts. So I did. Now as I watch the market nose-dive I can smile a bit knowing that someday my retirement portfolios will recover from whatever corrections come our way. In the meantime I can cash in my insurance policies and rest a little easier in the present.

Don’t Have Enough Money to Trade Options?

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Some people don’t have enough capital to trade options cost-effectively. There are still ways to participate in assets that allow you some insurance. One of the more interesting alternatives are long-dated pair options contracts. Learn more about this type of asset.

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