Question

How an investor can make profit from an anticipation that stock prices will decline in near future. Explain with an example.

Answer 1

An investor can make profit from an anticipation that stock price will decline in future by taking various positions-

A. The investor can purchase a put option and put option will give him the right to sell a certain amount of share and these put options are purchased by paying a premium and these options are not obligations infact, they are right to exercise. When the current market price goes below the strike price of put option put option becomes exercisable and the investor will start to make money

B. The investor can also simultaneously sell the call options because spelling of call option would mean that the investor is not expecting any upside in the stock, and he is expecting that stock will come down so he will get through the premium received and when he is a seller of option, he will have to square off its position, before the maturity of the contract and if the stock will move in the similar direction downwards, he will make money and eat the premium.

C. An investor who is expecting the shares to go down, can also short sell the the future of those shares, and he will have to cover his position after a prescribed time limit, and if the shares are trading below the selling price of the investor then the investor will gain from the relevant position.

D. Similarly some investor will also be buying the volatility index options, because when the prices starts to fall the volatility in the practical world starts to go up, and investor will gain on those options

E. Investor can also perform various combination of options together in order to gain from decrease in the value of the share.

So, these are the various positions an investors can take in order to make profit from and anticipation that stock price are going to decline in near future.