How to Profit From a Declining Stock

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How to Profit From a Declining Stock

When the markets are slumping and volatile as they are of late, some investors don’t want to risk trading in a market that is moving down. Other traders want to find options trading strategies like covered calls, that can help them hedge some risk until the market rebounds.

A covered call strategy is when you own stock and sell call options in the same stock that you own. You sell one call option for every 100 shares of the stock that you own.

I recently gave a real-time trading training session featuring a stock that has been trending downward since July: Las Vegas Sands (LVS). The casino and resort company is scheduled to release third-quarter 2018 financial numbers on Oct 24, after the market closes. In my video, I outline a couple of trading strategies to consider for a short term trade, or a long term strategy as I believe LVS will continue to trend lower.

There are two strategies that I discuss in my video.

1. Traders looking for a Long-term strategy: Consider a covered call if you are in the stock for the long run

Since LVS has been moving lower for some time, an investor might be looking for a strategy to hedge their losses if the average cost of the stock is above current market value. If you own the stock, you can be “covered” with the option. You are considered to be “covered” because the price of the call option that you sold will increase in value as the price of the stock moves down. As a seller of a call option, you receive money or “credit” in your account when you sell the option. This credit is the maximum you can make from the trade. When the price of the call is $0, the trade is at maximum profit and you keep all of the credit that you took in when you sold the option. As you sit in a trade that is losing money, by being long the stock (when the stock is moving lower), you can make a little money back each week by selling a call to collect some additional credit.

Covered calls can potentially led to a win-win-win situation. For example, if you use a covered call strategy in LVS as it is moving down, you can generate credit each time you sell a call and ultimately reduce the cost basis of the stock you own. When the stock begins to rebound, you will be closer to your average cost basis and being back in profit than if you had not sold calls during the decline.

  • Win: Keep the stock
  • Win: Keep the credit collected from selling the call options
  • Win: Keep any dividends that are issued while you own the stock

Now if you aren’t currently in LVS (Las Vegas Sands), there is also a short term options trade setting up.

2. Short-term strategy: Buy a put if you feel the stock will continue to trend lower

I personally think LVS is not just a long-term play. In fact, I see it heading lower to the $55 mark. As such, it is a good candidate to buy a put option. In my video, I explain how I act on a $55 put – once again, with the assumption that LVS will continue to move lower. This type of a trade would allow me to take advantage of a possible move lower after LVS’ earnings call in a couple of days, and still have time for the stock to continue its trend. Rather than buy a put that expires this week and have to pay more due to the increased implied volatility, I’m going to choose an expiry that is a few weeks out to try and compensate for the higher cost of calls or puts in this stock at the moment.

Don’t gamble with your portfolio

LVS might be in the business of gambling, but as an option trader, I’d rather bet against the house using market data, price trends, technical graphs, and well-timed strategies that have proven to work for me and my students for years.

I try to provide easy to understand and real-world trading insight for my readers. Because when it comes to successful investing, it pays to be knowledgeable, informed, and instinctive – rather than just lucky.

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