“Buy low and sell high” that is the secret to becoming a professional trader and living financially free right? If only it were that easy and clear cut then everyone would be incredible rich and successful. Now this is not to knock you down and tell you are going against the odds to quit before you start.
This is instead to really bring to your attention the amount of hard work that it will take for you to be able to develop your skill into becoming a successful trader. When you decide to become a trader you are making a decision to go against the odds.
You understood that the system of trading time for money is a loosing game and those who play that game end up loosing in the end. After they have traded all their time for all the money they are left with no time to enjoy the money.
When you start to trade actively you are making a decision to go against the common gradiant and no longer trade time for money. You are choosing to learn a skill that will allow you to earn an income regardless of how you are using your time. This is liberating due to the simple fact that you can now earn an income now based on the task you are currently acting on but based on the systems you have set in place.
Now it is very common for retail traders to look at the market and search for growing stocks. I always hear other individuals talking only about the stocks that are performing well and increasing in value. Very seldom do individual talk about the stocks that are underperforming or loosing value. When stocks start to go south and drop in price often times it gets ignored and put on the back burner until it begins to perform optimistically again.
The market is not always going to be in a perfect consistent uptrend following all technical analysis. Part of learning how to best trade the market required being fully aware of the various different strategies and methods that can be used to trade the market. Using Options trades one can potentially profit off the market regardless if price is in an uptrend, downtrend or even just maintaining a certain price and not moving at all.
Earlier this week I covered how to profit on an up trending stock. If you haven’t read that post I suggest you go there first and start with the Call Option before moving on to the Put Option trade. How To Maximize your Reward While Managing your Risk.
There are a lot of parts and pieces to an options trade and there are risks involved with any kind of investing. So I highly suggest you consult a financial advisor before making any kinds of investments you are unsure of. I am going to take the time to go over a quick strategy that you can use to be able to earn profits on a stock that is decreasing in price value.
Buying A Put Option
We can all agree the market moves in one of three options, it can either move up in price, down in price or stay the same price. As a skilled investor it is essential that we understand the market’s current trend and we focus on capitalizing on the current conditions of the market.
Skilled investors are not fortune tellers and do not predict what is going to happen in the market. They understand current conditions and hypothesize potential outcomes based on if certain factors play out and make decision once the market has confirmed the projected outcome.
Think of an investor of having a play book with an array of various strategies and set-ups. The trader is then looking and scanning the market finding areas in the market where specific conditions are present to where a desired strategy can be implemented. A Put Option is a trading strategy that allows for an individual to be able to profit on the drop in price of a stock.
They work similar to how Call options in work being that they have an expiration date and a specific strike price. When you purchase a Put Option you are buying the right to be able to sell a stock at a specific price before an expiration date. This can be incredibly beneficial in creating income during a down-trending market. Let’s see how we can use a Put Option Strategy on UPS
Part of the reason we look at UPS is due to their incredible fleet of aircraft which they operate. In 2018 UPS had an active fleet of 248 aircraft all of which are jet engine powered. They have various operations hubs located around the globe and they operate in just over 200 countries. They certainly have a strong presence in the aviation industry and have a strong history to be able to support the market trends that the price follows.
When selecting stocks to trade it is important to find companies that have strong trading volume. This will help support moves in the market as it shows the orders to back up the moves in the market. Large institutions tend to only stick to stocks with high volume as it allows them to make trades more frequently without disturbing the market so easily.
Although the current market overview is extremely positive this last week, we are beginning to see a bit of exhaustion on our most recent push. The last candle to close in the market begins to show signs of a potential reversal so we are going to look at a possible trade set up that can be made on UPS.
We are going to set up our trade on the idea that price will reject new highs and continue to push to lower levels. For this current trade we are going to look at purchasing a Put for a strike price lower than the current price. This will allows us to purchase the Put for a cheaper price as it is out of the money. With price currently at $105.63 lets look at either the Put option for either $105 or $100.
The Put that expires on the 16th of August for UPS at $100 is being sold for $1.31 a share. If we are deciding to purchase 1 Put Options contracts we are buying the right to be able to sell UPS at $100 on or before Aug 16th.
Each contract is for 100 shares. So if we purchase 1 contract the premium we would be require to pay, to be able to purchase this contract would be $131. Yesterday the price of the option rose by $0.03 and the Volume (VOL) shows how many contracts are currently open in the market.
This option expires next month so that being said this trade is one that you could potential hold until then to be able to maximize your profits. The object now would be to see how price rejects off the current price level. As the value of UPS stock drops the Put Contract that you have will gain in value. As price gets lower and closer to our strike price of $100 potentially going below our strike price this greatly increasese the value of the Put option.
To be able to secure our profits we would sell the Options Contract back to the market once it has increase in value and before our expiration date. Make sure to watch for your expiration date as if you go past the date the coupon will become worthless and you will loose the entire value of your investment and whatever assumed profits you had earned.
Learning how to be able to earn consistent returns regardless of what the current market condition is will ensure your ability to be able to create success. Learning and understanding how to use various trade strategies can not only help protect your account from experiencing uncontrolled losses but it can also help to maximize the potential earnings in your investment account.
For more info on how to get access to some of the exact trading tools that I use on a daily basis click the link below.
It is very easy to get caught up in the mechanics of how the market works and trying to understand every single moving piece can something be paralyzing. I like to think of the market the same way as flying a plane. One can learn how to fly a plane without being a mechanic the same way one can learn how to trade the market without being an economist.
Do not feel that it is necessary to understand every last detail of the market before making the decision to start investing. Start to learn some skills and strategies then go and practice them. Then come back and study a bit more and ask more questions before going and practicing them again. The only way to gain proficiency in a skill is through practicing perfectly.
With this week nearing an end lets see how the market continue to play after recent record highs. I personally am looking on the bias of seeing some retracement in the market. If price begins weakening in the market see where you can set up a few Put trades to be able to still gain profits during the downtrend.
Let’s see how UPS holds on during the next few days.
Will it reject and push downwards or can we see market pressure continue to weaken and the price gain strength?
Post your ideas below and comment on my TradingView where you can see my charts that I have marked up. Most importantly keep your eyes forward looking for what’s to come ahead!