Here are three simple ways to benefit from falling stock prices:

1.Buy a put.

Buying a put option gives you the right, but not the obligation, to sell 100 shares of the underlying stock at a given price, called the strike price. If you think stock XYZ is going to fall to $20 a share, and it is currently trading at $40 a share, then you could purchase a put option with a strike price of, say, $35/share. Right now, that put option has no intrinsic value; after all, who wants to sell at $35 when the stock is now trading at $40? Because the stock price is currently higher than the strike price, you can probably buy the put fairly cheaply. When that stock does fall to $20, you can sell the put, which will now be worth over $1500!

2.Sell a call.

A call is the opposite of a put. Buying a call gives one the right, but not the obligation, to by 100 shares of the underlying stock at the strike price. In the previous example of “stock XYZ”, you could sell a 35 call. Right now, that call would be worth at least $500, since buying the call would enable someone to purchase 100 shares at $35 a share, for a total of $3500 dollars. They could then turn around and sell that stock at $40 a share for a total of $4000, netting $500. In reality, the call will sell for a little more than $500, since actual value is always more than intrinsic value.

When stock XYZ falls to $20, that $35 call will have no intrinsic value. You can either buy it back cheaply or wait in the hope that it will expire worthless.

3.Short a stock.

When you short a stock, you “borrow” it from your broker so you can sell it without having bought it. In the mean time, you will be paying interest on that borrowed stock. Holding a short stock position is not something you want to do for a long period of time. However, if you sell XYZ short at $40 and it falls to $20, you can buy it back for half of what you sold it! That’s a great trade! Buying back the borrowed stock is called “covering a short”.

The three strategies above are all ways to profit from falling stock prices, but they each have different risks. Buying a put option means that the stock has to drop enough that the put will be “in the money” enough to make up for the premium you paid Read More »

Discover the key technical elements to determine if you should buy a stock.

1. Prior to a stock price rise, the volume will diminish, until all sellers (supply) have exhausted themselves. Odd small lot sales can be a signal of the end of the price decline.

2. In a downtrend the bottom will occur in the 3rd, 5th or 7th wave down. Now the price can make a dramatic jump here and will tackle overhead resistance. The key thing to look for is a very large increase in Volume. Institutions will move in and usually make their purchases between 3:30 and 4:00 p.m. This is called looking for Footprints. So essentially we are looking for strong hands to move in.

3. They say don’t buy the first breakout. If you do buy the first breakout run with tight Stops. You can also wait for price to return to test the breakout point (support level). If price successfully tests support and breaks above this point you can buy the stock. You can also put in a buy stop at 3 percent above the breakout level. This will keep you out of the stock unless it breaks out.

4. If price has been in an uptrend but is correcting, look to see how it reacts to the 38.2 and 50% retracement levels. A stock that rebounds from the 38.2% Fibonacci retracement level is a strong stock.

5. If price gaps up with large volume and the gap is not filled that day, with price ending close to the high of the day, then this confirms a ‘rising stock price’. If the gap occurs over a resistance point then this is double confirmation to enter.

6. If you see a very long white candle with a long tail occur with volume pay special attention and be prepared to buy if positive buying occurs the next day. Candlestick formations to look for are Bullish Engulfing, Morning Star and Three White Soldiers.

7. When the up days outnumber the prior down days this usually confirms that you have entered a bullish uptrend.

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