Introduction to Options – Put Options

Rich Dad Education trainers take their lifelong trading experience and pass it along to students through various educational offerings. This experience helps prepare students to approach the market in a logical and consistent manner. It also helps students identify and take advantage of a variety of market conditions. Identifying bearish conditions and knowing when to enter the market can be a highly profitable endeavor.

Put Options

The buying of put options is a simple and straightforward approach in which a new trader can take advantage of bearish trade setups. Here is a basic overview of put options:

1. You can buy a put: puts are bought on stocks that traders believe will go down in price.
2. Your entry into a trade using puts should be determined by your technical and charting knowledge of the stock.
3. Buying puts does not benefit from time decay.
4. You have theoretically an unlimited reward from buying puts to the point where the stock goes to zero.

Buying Put Trade Setups

 Rich Dad Education students are trained to identify bearish trade setups. They are never forced to rely on guessing or their gut. Traders who simply buy put options because they are sure the market is going down based on their feelings exhibit extreme novice behavior and can be severely punished by the market.

Here are some technical criteria to look for when attempting to identify potential bearish trades.

Strong Areas of Resistance

When you identify strong areas of resistance, you gain solid knowledge of how the stock may potentially behave. Strong areas of resistance often keep the price from going above that price area and can give you valuable knowledge on when you should enter a bearish trade. Traders often attempt to identify a stock in a bearish trend and then enter into the trade via buying a put when the stock hits one of these areas of resistance and then starts to head down again.

Bearish Trends

When buying puts, it is wise to be trading in the direction of the trend. Strong bearish trends enhance the probability of a winning trade. Traders that attempt to buy puts when a stock is going up can have occasional success by identifying short-term halts in the trend; however, this is similar to fish swimming upstream. Traders can simplify their lives and trading by going with the trend as this tends to increase the probability of success.

Overall Market Trend

If the broad markets are in a downtrend then this helps the chances that the stock might get pulled along with the trend. The same logic of swimming upstream applies. Don’t try and be the smartest trader in the world by identifying narrow windows where you can trade against the trend. Simply go with the trend and enjoy the highly profitable results.

Breakouts of Strong Areas of Support

It is a well-known fact in the trading world that stocks fall faster than they rise. Identifying when these fast falling periods may occur can be extremely profitable. When the price of a stock falls through a price area that had previously demonstrated strong support, the results can often be quite dramatic. It is important to learn to identify these areas of support. Once these price areas fail, you need to develop trading rules that help determine when you should enter the trade. The buying of a put can be the trading instrument you use to profit in these scenarios.

These are just a few of the basic, yet fundamental things you should look for in determining whether it is appropriate or not to enter a bearish trade. There are many bearish strategies that can be used to profit from these trade setups and the buying of a put is one of them. The next article in this Rich Dad Education Options Series will cover another of the four option building blocks, the selling of calls.