Down Trending Strategies

Brian Cox6/18/06

Investools Discussion Group Helping People Invest Smartly

L a Gr o up

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Down Trending Strategies

I became involved with Investools because I heard that you could make money when the market is going up, going down or if it’s going sideways.

I you are just buying stocks, then you are playing only one of the three directions.

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Down Trending Strategies

It looks to me, that we’re possibly heading into a long summer of down-trending stocks. If so, I’m planning on employing some strategies to create profit.

When the market is heading downward, its referred to as bearish.

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Strategies covered

Neutral Covered call Collar Straddle (long, short) Strangle (long, short) Butterfly Condor

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Strategies covered

Bearish Long Puts Naked Call Put Backspread Bear Spreads (Call, Put)

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List of Neutral StrategiesCovered Calls (option)

Selling a call against stock you already own. It’s neutral because if the stock stays the same, you still make money

The Collar (option)For investors who want to a nice low risk, limited return strategy to use in conjunction with a long stock position, collars are a great alternative. In this case, the collar is created by combining covered calls and protective puts.

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List of Neutral Strategies (cont)Long Straddle

For aggressive investors who expect short-term volatility yet have no bias up or down (i.e., a neutral bias), the long straddle, This position involves buying both a put and a call with the same strike price, expiration, and underlying.

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List of Neutral Strategies (cont)Short Straddle

For aggressive investors who don't expect much short-term volatility, the short straddle can be a risky, but profitable strategy. This strategy involves selling a put and a call with the same strike price, expiration, and underlying.

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List of Neutral Strategies (cont)Long Strangle

For aggressive investors who expect short-term volatility yet have no bias up or down (i.e., a neutral bias), the long strangle. This strategy typically involves buying out-of-the-money calls and puts with the same strike price, expiration, and underlying.

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List of Neutral Strategies (cont)Short StrangleFor aggressive investors who don't

expect much short-term volatility, the short strangle can be a risky, but profitable strategy. This strategy typically involves selling out-of-the-money puts and calls with the same strike price, expiration, and underlying. The profit is limited to the credit received by selling options. The potential loss is unlimited as the market moves up or down.

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The Butterfly

Ideal for investors who prefer limited risk, limited reward strategies. When investors expect stable prices, they can buy the butterfly by selling two options at the middle strike and buying one option at the higher and lower strikes. The options, which must be all calls or all puts, must also have the same expiration and underlying.

List of Neutral Strategies (cont)

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Condor

Ideal for investors who prefer limited risk, limited reward strategies. The condor takes the body of the butterfly - two options at the middle strike - and splits between two middle strikes. In this sense, the condor is basically a butterfly stretched over four strike prices instead of three.

List of Neutral Strategies (cont)

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Slightly Bearish Strategies

Protective Puts

Using protective puts is simple and can be relatively inexpensive given the insurance value. For each 100 shares of stock you buy, buy one protective put at a strike price or two below the current market price.

For example, if you buy a stock at $50, you'd buy either the 47.5 put or the 45 put. That way, if the stock plummets, you'll be able to sell the stock for close to what you paid for it.

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Long Puts

For aggressive investors who have a strong feeling that a particular stock is about to move lower, long puts are an excellent low risk, high reward strategy. Rather than opening yourself to enormous risk of short selling stock, you could buy puts (the right to sell the stock).

List of Bearish Strategies

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Naked Call

Selling naked calls is a very risky strategy which should be utilized with extreme caution. By selling calls without owning the underlying stock, you collect the option premium and hope the stock either stays steady or declines in value. If the stock increases in value this strategy has unlimited risk.

List of Bearish Strategies (Cont)

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Put BackspreadFor aggressive investors who expect big downward moves in already volatile stocks. The trade itself involves selling a put at a higher strike and buying a greater number of puts at a lower strike price.

List of Bearish Strategies (Cont)

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Bear Call Spread (Credit)For investors who maintain a generally negative feeling about a stock, bear spreads are a nice low risk, low reward strategies. This trade involves selling a lower strike call, usually at or near the current stock price, and buying a higher strike, out-of-the-money call.

List of Bearish Strategies (Cont)

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Bear Put SpreadFor investors who maintain a generally negative feeling about a stock, bear spreads are a low risk, low reward strategy. Involves buying a put at a higher strike and selling another put at a lower strike. Like bear put spreads profit when the price of the underlying stock decreases.

List of Bearish Strategies (Cont)

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Summary

We have outlined the following

Neutral Covered call Collar Straddle (long, short) Strangle (long, short) Butterfly Condor

Bearish Protective Puts Long Puts Naked Call Put Backspread Bear Spreads (Call, Put)

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Summary (cont)You may wish the employ the Bearish Strategies on the Indexes (QQQQ, SPX, SPY, OEX, NDX, DIA) or the ETFs.

Always paper trade when you try something new

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Summary (cont)This presentation is located on the website at:

http://xsprofits.com > presentations

Details on typical strategies is located on the webstite at:http://xsprofits.com > strategies

If you discover any errors or corrections please contact me at:brian-cox@coxintl.com