Have you ever heard of a Stock Market Crash?
Do you know that is a whole bunch of baloney?
When you hear that phrase it makes you think that all the money in the Stock Market has just fallen into a big black hole doesn't it?
But it can't just disappear, so where do you think it went?
It went out of the hands of those who didn't know what they were doing and into the hands of those who knew EXACTLY what they were doing!
Stock Options are a very powerful vehicle for making money in the stock market with a smaller amount of money than if you were to buy the actual stocks themselves.
And it's very hard to profit from a falling share price when you own the stock.
But if you owned a PUT OPTION over a falling stock it would GO UP IN VALUE as the stock price dropped!
Put Options give you the right to sell shares and as a stock price falls the put option will increase in value. This means you can use put options as insurance over shares you own to protect you from the brutality of a market crash.
However, Options Trading using Puts can rake in the profits for you in a very short period of time when the market is falling, allowing you to make money as income!
Let me explain...
What if the media had been spouting doom and gloom about a possible financial crisis and the banking sector was most certainly going to get hit hard as a result?
The Smart Options Trader would look at a big banking stock on their company stock chart and he might see unrest in the buyers and sellers. His analysis may tell him that the share price was likely to fall.
Let's say the price is trading at $ 55 and he buys an In The Money Put Option with one month till expiry. The option strike price is $ 56 and for this he pays $ 3 in premium.
The maximum he stands to lose is his $ 3 should the stock price rise above $ 56.
The following day the share price drops to $ 52 and the Put Option is now worth $ 6. The Smart Trader could sell his Put Option on the market today and realise a profit of $ 3 or he could hold the option a little longer for more profit if his analysis told him the price was likely to fall farther.
When you look back in history at the stock market, you will see that prices tend to go up slowly, but when they fall, they fall fast. In a stock market crash the prices fall suddenly, and with this comes an increase in volatility, resulting in high Put Option values.
As I said, the money falls into the hands of those who know exactly what they are doing, and Put options are the perfect vehicle for doing just that.
Article Source: http://EzineArticles.com/?expert=Jules_Dawson
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