How Do You Make Money When Markets Fall?

Overall, the stock market trends upward. Even when prices fall, you can expect them to eventually recover and move higher than ever. Despite this truth, investors tend to make irrational choices when stocks fall rapidly.

You don’t have to view falling markets as a negative event. In fact, drops create terrific opportunities for you to make strategic buys that can lead to short-term and long-term financial growth.

Here we discuss how you can make money when markets fall.

Put Options

A put option gives you the opportunity to sell an asset when it falls within a predetermined price range. You are not, however, obligated to sell the asset when it reaches that price range. A put option can be applied to any type of underlying asset, including stocks, currencies, and commodities.

Put options are valuable investments because their values increase as the underlying asset’s value decreases. This allows you to make money when markets fall.

How much money can you make from put options? That depends on several factors, including:

• The asset’s purchase price
• The asset’s sale price
• The put purchase’s price
• The cost of fees and commissions
• Greeks (theta, vega, delta, rho)

Broadly speaking, you can summarize the profit of a trade with the following equation:

If a stock falls from $200 per share to $100 per share and you bought a strike 200 put option for $10, your profit would be $90 per share (the difference between the strike price and current share price minus the cost to buy the put option).

Short Stocks

Short stocks give you a chance to make money by speculating that a stock’s price will fall. When you believe that a stock price will decline in the near future, you can borrow a number of shares and sell them at the current price to investors.

To short a stock, you start by borrowing shares. At this point, you do not pay any money. Instead, you promise to pay back the owner in the future. For example, you might borrow 100 shares of Tesla with the obligation to buy them at some point in the future.

By selling the borrowed shares, you create the potential to profit.

Let’s say you borrow 100 shares of Tesla (TSLA) and sell them for $1,000 each. You believe that the value will decline within 10 days, so you plan to buy the stock 10 days later. When the time comes, you buy the 100 shares.

You profit when the price of Tesla shares is lower than it was when you borrowed and sold them. If the price is below $1,000 per share, you make a profit. For instance, let’s say Tesla stock falls to $900. Here, you would sell the borrowed shares for a total of $100,000 but you would only spend $90,000 buying the shares. You would earn $10,000 minus any fees or commissions and interest charges.

Notice that you are obligated to purchase the asset at some point in the future. If Tesla’s price had increased to $1,100, you would have to buy them at that price, which means you would lose $10,000 plus commissions, fees and interest.

Buy the Volatility Index (VIX)

Volatility is ironically a constant in the stock market. Without volatility, investors would never have opportunities to “buy the dip.” You need values to move up and down to catch a deal, and the more movement the better the deals.

The volatility index gives you a more direct way to make money from changes in the stock market. Typically, you will buy exchange-traded notes (ETNs) or exchange-traded funds (ETFs) attached to the index.

You make money by investing during periods of low volatility (or at least when most investors believe that the market is stable). As volatility increases, the value of VIX goes up, which means you profit buying VXX even when other investments fail.

Buy Stocks While They’re Cheap

When markets fall, they create enormous opportunities for investors with cash to scoop up bargains. Ideally, you want to buy stocks at their lowest prices. That way, you profit more when their values increase.

For example, the technology sector starts to plummet, giving you the opportunity to buy stocks at extremely low prices. You might purchase Apple (APPL) for $50 per share. You believe that the sector will regain its value, so you hold on to your shares while other investors panic and sell theirs.

A year later, Apple has returned to its former price of $155. Your investment has already gained $105 per share. At this point, you could either keep those shares in your portfolio or you could choose to sell them for a short-term profit.

Invest in Safe Haven Assets

Safe-haven assets have shown a tendency to retain their values even during times of volatility or falling prices. They are considered investment “safe havens” because they protect your portfolio from loss.

Popular safe-haven assets include precious metals, bonds and certain currencies.

Conclusion

Investors need ways to make money even when markets do not increase in value. Given enough time, you can always expect the stock market’s value to grow. That doesn’t mean you have to wait. By following the right investment opportunities, you can make money no matter which direction markets take.