With the market plummeting today…
Some traders are getting shook and piling into puts and trying to short stocks…
To me, that can get pretty expensive… and dangerous.
For me personally, I try to stack the odds to my favor when I’m looking to bet against stocks.
Well, I use an options strategy that allows me to profit in three different scenarios…
One that I believe can be beneficial if stocks do start to pull back.
So what strategy am I referring to?
When it comes to betting against stocks, many traders often look to short shares outright.
In other words, they want to borrow shares from someone who already owns the stock…
And sell it, to wait for a drop… so they can buy back shares on the cheap.
However, shorting stock outright can be pretty risky, and not something I like to do.
While buying puts is an alternative… it makes traders susceptible to drops in implied volatility. Additionally, they’re at the mercy of time.
For me personally, I like to use a strategy that allows me to benefit from drops in implied volatility and time decay.
Not only that, but this strategy actually allows me to profit in three different scenarios (something that buying puts and shorting stock outright just don’t offer).
What’s this strategy called?
Well, the bear call spread… or short call vertical spread.
With this strategy, it means you may be neutral to bearish on a stock or exchange-traded fund (ETF).
Let me explain.
To setup the bear call spread, one would sell a call at strike price A, while simultaneously buying a call at strike price B.
Typically, the stock will be below strike price A.
So let’s say a stock is trading at $145… and you don’t think it will get above $155.
Well, if you want to bet that the stock won’t get above that level (or will sell off), you can sell a call at $155, and buy a call at $150.
The bear call spread actually allows traders to profit in three different scenarios:
- If the stock rises a little, but stays below $155.
- If the stock collapses
- If the stock stays in range, but below $155
Now, the thing about this strategy is the maximum profit is limited to the net credit received for establishing the position.
So let’s say you were able to establish a position for a net credit of $2.50… and you sold 10 calls. Your maximum profit would be $2.50 X 100 X 10 (or $2,500).
On the flip side, your maximum loss is defined here. Typically, your broker will let you know what the maximum loss for the strategy is when the strategy is established.
This is one strategy I’ll look to use if I believe stocks will pull back… and one that I believe can help to stack the odds in my favor.
Now, if you want to learn more about this strategy and how I use it to my advantage…
I detail my number 1 edge when it comes to options trading in my latest eBook, Wall Street Bookie.