How to fight a falling market

You’ve probably heard the market maxim, “Don’t fight the Fed.”

With inflation at its highest level in 40 years, the Fed has no choice but to tighten policies…raise interest rates…and shrink its bloated balance sheet.

And because the Fed’s easy money policy drove stocks higher after the COVID sell-off… its removal is causing the market to collapse as investors flee.

In other words, if you “follow the Fed,” you can explain most recent stock action.

And once you understand how the market reacts to Fed policies, and vice versa, you can even predict the Fed’s next step…and prepare.

Some investors walk away from the market…and then back into it when they see a clear signal. Others could reduce their exposure to the market…

And others add to their hedges, like put options– or what I like to call “portfolio insurance”.

Similar to life insurance, portfolio insurance protects an investor against an adverse event… More specifically, put options, when used correctly, allow you to profit from a decline in a stock, a sector or a market.

Here’s how to use put options to build portfolio insurance…

When you buy a put option, you buy the right (but not the obligation) to sell an underlying security (stock or ETF) at a specific price (strike) before a certain date (expiration).

If the price of the underlying security declines, the value of the put option increases – and the faster and steeper the decline in the asset, the more you can potentially earn on your put trade, all else being equal.

Buying a put will cost you money up front. Think of it as an insurance premium…

But, like an insurance premium, it’s the maximum you’ll be exposed to if the asset doesn’t eventually decline. And if you’re right, you’ll get paid.

In other words, when you hold a put option on a specific security, you are positioned to profit from the decline in that security…

You might think it’s too late to start buying insurance amid the market sell-off.

But nothing could be further from the truth.

For one, no one really knows where the market is going. It makes sense to maintain hedges of some type at all times – for safety when the market is rallying…and for profit when it isn’t.

Second, the downside can feed on itself – as investors start to flee, others get spooked and do the same – generating more pain for your “long” portfolio (assets you think have an advantage) , but more profit for your short positions based on put options. (The tech-heavy Nasdaq is already down about 28% from its highs – and short positions in some of these stocks are generating big Money flow trader earnings.)

And finally, there is almost no place to hide in this sale, as you can see from the chart below. Put options offer investors a way to go against the grain…and profit when all else fails.

Of course, all the usual disclaimers apply.

Options are a tool to be used with care… If you get the direction of the asset wrong, its volatility or the timing of your trade, among other things, your put could expire worthless. So only invest what you can afford to lose on the “insurance premium”.

But if you plan carefully and understand the risks…a put option can provide excellent protection against a falling market.

PS Last week my Money flow trader readers were lucky enough to lock in triple digit gains for the 4th time in 2022…

Using the strategy I described above.

Don’t let options scare you away from such profits.

I will guide you every step of the way.