There are several ways to profit from a falling stock, but for tonight we are going to discuss the two most basic principals, shorting stock versus buying \”put\” options.

If you have been with us for any length of time you know I have written many times about how to \”short\” a stock. Basically you are simply selling a stock now, taking in the cash for the sale, and \”buying back\” or covering the sale at a cheaper price. so if you \”short\” ABC at 60 dollars and you sold 1000 shares, you took in 60,000 dollars. Now if ABC falls to 50, and you \”Cover\” you are buying it back cheaper. In this case you will spend 50,000 dollars. The difference between where you sold and what you spent, 10 G\’s is your profit.

That really is as easy and as basic as it gets friends. Don\’t let all the talking heads throw you a curve ball, shorting is easy and its really no more risky than going long as long as you use stops to protect yourself. Since the market goes up and down, if you only play the long side, you are missing a lot of profit potential.

But there are problems with this approach. First you need a margin account to do it, all short sales are through margin. Second, it eats up a lot of your buying power because when you go short, you are holding that position with margin that will tie up your money.

The other play is a put option. Here again Wall Street has tried to buffalo the average investor into thinking options are for the big boys. What nonsense! Anyone can and should use call and put options as a trading strategy. The risk is limited, and the returns can be phenomenal because of the leveraging inherent in options. With a put option, you are placing a bet that the stock is going to fall. Win the bet and you will win big time. Lose the bet and just like Vegas, your loss is limited to how much you bet.

If the market is going to run up for a few weeks and then spiral back down, which way should you play? That is impossible to say, we don\’t know your style, your risk tolerance, your bank account balance etc. but for us it\’s an easy call, put options win out over shorting in a scenario like that.

By using put options we can use a relatively small amount of money to be in several \”plays\” and each of them could return several hundred percent returns. Look at it like this. If you short ABC at 100 and it falls to 60 fantastic! You made 40 points and 40%. But if you buy put options for 1.75 and they go to 10.00, what is the percentage there? Over 500%. And look at the cost. It\’s next to nothing, to get such a shot at big returns.

For our money, when the time is right, buying puts against the Dow Jones Industrials, the NASDAQ 100 and the Composite and select individual stocks that carry high P/E\’s will be the way to go as we feel those will be taken to the woodshed for a spanking.

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Writen By : Larry Potter

Tags: daytrade, daytrader, daytrading, invest, option, options, PROFITS, stock, stocks, trade, trading

We want to expand on something that we hinted at and it?s about ?indexing? and the myth that the market only goes up, so therefore you should buy and hold. First, if we asked you what the biggest single business on earth is, we?d bet that not many would pick the stock market. But trust us it is. The daily trading of just one popular stock is often a significant percentage of the entire daily GDP in dollar terms. It?s huge and with more than half of our population investing in the market through 401K?s, or even your insurance company investing behind the scenes, you are indeed involved.

When you are talking about an industry that exchanges billions upon billions of dollars worth of goods every day, you are indeed talking big business. Look at WMT. They sold a billion and a half dollars worth of goods on Black Friday. Wow. Well the NYSE did a billion and a quarter shares of stock swapping. And each of those shares cost between 5 and 100 dollars. The dollar amount is staggering. So, since stocks are the biggest business on earth, don?t you think the biggest and brightest minds have come up with all the tricks of the trade to keep it growing? You bet.

Indexing was one of their biggest corrupt inventions. Why? Well along with the fact that they reshuffle the index?s (there have been 27 changes to the DOW) so they can discard ?bad poor performing companies and put in winners?, there is the problem of weighting that comes into view. When an index is weighted so that company A is more important than Company B and that more important than company C, where do you think the bulk of the money that comes to an index fund will go? To company A of course. It doesn?t matter that Company B might be better, or that company C might be growing faster, the money will go to company A first, then b, then c.

So, is it any wonder why the well known names get so bloated? Is there any wonder why P/E?s get so excessive? Every person that ?puts? his money in an index fund is primarily buying that first most heavily weighted stock, first. So, indeed, that stock pretty much ?has? to go higher in time simply because every person that puts in a buck in an index, is sending a portion of it to buy that company. Now, with a portion of everyone?s dollars going to the heavyweights of an index, and in a good year an index can indeed move 40%, there are a ton of money managers that get paid to ?beat the index?. Well how can they do that? By buying smaller riskier stocks. They know that if they can create some excitement in a low float, small or micro cap, that thing can catch fire and double, or triple. They need those doubles and triples to beat the index?s or they get fired for under performance.

So, when the index?s are getting big money inflows, they roar higher. They have to. The small caps fire up so that hedge funds and private money managers get to fire them up and beat the indexs. But because of the weighting involved with indexing, what we often see is grotesque imbalances. Tiny companies with little hopes of ever really doing anything special are bid up, trading at 100 times sales. The individual investor sees the excitement and wants in, but he generally has no idea why he?s buying the darned thing. When the index funds run out of steam, the smaller issues then become targets for serious selling. The run will end as badly as others have for them with precipitous drops. This is what indexing has done for the market, it?s created a boom/bust cycle for smaller issues that is out of the scope of reality. They rarely end well.

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Writen By : Larry Potter

Tags: daytrade, daytrader, daytrading, invest, option, options, PROFITS, stock, stocks, trade, trading

Have you ever started an exercise regimen, only to see that you aren\’t getting the results you wanted? It\’s awful common, yet sometimes the real reason eludes the person. I remember being in a gym, where a young man of about 30 was trying to add some muscle and definition. He\’d do three sets of this, and three sets of that. He\’d split train his upper half one day, then his lower half the next. He worked so hard, and yet he wasn\’t getting the results he wanted. He was getting stronger, and tighter, but his muscles wouldn\’t grow in size the way he wanted.

This guy was indeed becoming frustrated, and of course because everyone seems to be an expert when you\’re at the gym, I heard people telling him to do carbo loading, protein loading, work more on the \”negative\” side of the exercise, do super sets, you name it. The one thing I didn\’t hear anyone suggest was that maybe he was over training. He was taking his routines from magazines like Muscle and Fitness, written by world class body builders. Was he a world class body builder? No, he was \”Mike\” a painter. I didn\’t find it surprising that he wasn\’t getting the results he wanted, he was training his body as if he was a true world class body builder, but in all reality he wasn\’t.

I am not an expert on body building, but I\’ve done my share, and I have a fairly good dose of common sense. So, one day I mentioned to him that maybe he was pushing too hard. His body didn\’t have the years of recuperative experience that the guys in the muscle mags have. I suggested that he was stressing his muscles to the point where they should have been rebuilding even bigger and stronger, but before they could do any growing he was pounding them again. For what ever reason, he figured he had nothing else to lose, so he scaled back his intensity, and frequency of workouts. Almost immediately the results were noticeable. Within a month of his more laid back regimen, his arms, chest and legs had grown measurably. Doing less got him more.

Sometimes it\’s the same thing in the market. Sometimes we push so hard, over analyze so much, that we find ourself doing more harm than good. Staring at a screen watching every tick higher or lower, starts to get your mind racing about every conceivable possibility on earth. Pretty soon a small downdraft has you mashing the sell button for a loss, and then five minutes later it\’s back above where you bought it. Sometimes you can do so much research that you get information overload and then you do absolutely nothing instead of making a play. Because we are humans, our emotions usually rule us. But, in the investing game, emotions will rip you to shreds. The best traders and investors I have ever met have mastered the art of removing emotion from their investing.

This is not an easy thing to do. When you hit the buy button, money, real money that you\’ve worked, for is now on the line. We don\’t like to lose money, so our brain kicks into high gear. Instantly a completely normal ten cent downdraft is the end of the world. Panic sets in. You are convinced that you just bought the evil stock from hell, determined to see to it that you lose all your money. You sell out with a loss and sit back trembling. Whew, glad that\’s over, you say. But more times than not, you look later and the stock is comfortably higher than it was when you bought it. You lost money, on a winning trade because you \”over did it\”. You over analyzed. You pushed too hard.

In a trending market, you want to look for reasons to leave a stock in play. If there is a sound reason for it to weaken, then certainly you have to bail out and move on. But sometimes a stocks weakness is not because the stock did anything wrong, it\’s some outside factor that influenced the problem. That\’s what happened one Wed to a lot of traders. The market was supposed to be up. But even after tremendously strong numbers it was weak. So, it stands to reason that individual stocks were weak too. But was that a reason to sell out? Or would the appropriate thing to do, be trying to find out why the overall market was weak, and then make a decision as to what to do? Obviously the second choice makes the most sense.

The moral of this story folks is that sometimes it\’s better to take a more relaxed approach. We aren\’t in the business of scalping for pennies here. We are trying to enter stocks that are breaking out, showing momentum, or moving on news or product development. Sure there are going to be times when you enter a trade that seems to make sense and it will go haywire on you. Absolutely. But if the reason for the trade was sound, and all of a sudden you see the stock going the wrong way, it\’s often best to sit back and try and find out if it\’s stock specific or there is a wider situation going on. That Wed the market weakness was the result of a rumor that there had been some form of \”incident\” concerning a subway. Terror fears flared up. Stocks sold a bit. It would have been easy to just hit the sell buttons and bail out. It took some discipline to sit back, survey the overall land scape and decide that the trend was still intact.

Try your best not to over do it folks. Don\’t stare at every tick. Don\’t over analyze. This isn\’t easy to do by any means. But I absolutely believe that you can all increase your winning percentages if you do indeed take a more relaxed stance. Sure you still want stops in case there is some calamity going down. But even stops aren\’t written in stone. If something is about to stop you out, sit back a moment, look at the overall market, was there a rumor? Was there a report? Are the other stocks in the sector weak too? Downdrafts happen. Sell programs happen. They key is not panicking when they do. Don\’t over think it. It\’s not easy, but it\’s necessary.

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Writen By : Larry Potter

Tags: daytrade, daytrader, daytrading, invest, option, options, PROFITS, stock, stocks, trade, trading