What is the difference between traders and investors? Investors can only invest in businesses hoping that the investments are going to grow in value or bring dividends.
On the contrary, traders are more flexible in terms of opening, maintaining and closing a trade (time, lots, asset etc). Investors usually benefit from growth and can only exit their investments in order ot reduce the loss in the worst-case scenario. On the contrary, traders can benefit from any market state (whether the market goes up or down).
More often than not, the so-called «buy and forget» approach to investing can give you higher yield than interest on bank deposit. Still, what if we want more ROI than 10% a year?
Well, there are hundreds of other moneymaking strategies but few of them can actually guarantee you consistent results over the long term. Yet there is nothing mystical or magical about decent moneymaking opportunities. We all know what makes a good winning Forex trader (Market Leader wrote about it many times). The same holds true for stock trading:
· Choosing the direction of the major trend.
· Finding an entry point.
· Placing a stop-loss order (or rather finding something that can insure your trade).
· Exiting the market to take profit when it is the right time.
There is no perfect strategy, every one of those strategies has its own weak and strong sides. Still, some of them are obviously better than others.
When it comes to stock market trading, shorting is one of the most profitable strategies if you know what you are doing.
How to Short Stocks Profitably?
There are times when companies with relatively stable financial performance and decent market share suddenly face negative news or publish weak income reports. In such cases, their stocks drop in value dramatically, sometimes 20%, 30%, 50% or deeper almost in a matter of days or even hours. How can we benefit from such situations? The first thing that comes to mind is shorting.
Let's consider the stock of NU SKIN (NUS) as an example. This is a company with strong financial figures, the leader in the niche (the major rival to Herbalife). Suddenly, Chinese media report that the local authorities start suspecting that the company's structure is a typical financial pyramid. As a result, the stock loses almost 50% of its value in 2 days. If we had sold/shorted the company's stock we could have profited the following way:
Apparently, this is the ideal scenario that is far from manifesting itself in real life. The real working scenario is either A-B or A-C:
What if mass media publish a news release disproving the preceding one? The background may change rapidly to bring the price back or even higher since the company is an industry leader with consistent financial results. So, maybe it is better to wait till the price finds the bottom and then to buy the stock? It would be possible to enter at point A or B:
Still, at this point we have: China's suspicion, the possibility of the shareholders suing the company , delayed quarterly reports, which cause extra concerns. Under such consequences, buying the stock can hardly be called a good idea. Still, if the quarterly report goes stronger than expected, it may well bring the stock higher.
What to do and how to benefit form trading options on the company's stock?
Indeed, th list of challenges we are facing in this case can be reduced to 1-2 items by means of options.
In order to benefit from the underlaying asset (the stock of the company in question) we should first identify the direction of the further price move (which is not that easy). The we should define an entry point, stop-loss levels etc.
When we consider option trading, selling options in particular, than all we need to do is to define an appropriate entry point and the price range the price is likely to stay within. That's it! No other issues to resolve. These are resolved by the construction of the particular option trade.
The only thing we care about is the top/bottom of the price range, which shouldn't be broken by the price over the trading period.
If to consider this particular situation, we bet online that the price doesn't fall below 65 and we turned out to be right.
The idea was fairly simple: the company's stock had dropped some 40% (due to those problems in China) by the time we entered the market. The probability of a further 50% decline is almost zero.
The bottom line. The deal averaged $80 per each option construction that needed $400 to be opened. This means we profited 20% in 4 weeks. By the way, these moneymaking opportunity was found by students of Masterforex-V Academy that had studied for a months by that time. Can you imaging their potential in a year? By the way, you can join Masterforex-V Academy and its FREE school for beginning traders and investors to show even better results! Good luck!
