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Bottom Fishing Stocks Using Options

Bottom Fishing Stocks Bottom fishing stocks is a term used to describe a stock purchasing strategy which focuses on buying company shares whose market price has taken a large and decisive price dive accompanied by notably increased trading volume.

The general idea is that the explosive volume tends to wash out the sellers from the market, leaving it ready for the buyers to come back in and take the share price to higher levels. Hence the term "bottom fishing stocks" - you're fishing for stocks at what you believe may be at the bottom levels of it's price action and ready for an upwards price reversal.

Bottom Fishing Stocks at Even Cheaper Prices

If you know anything about option trading you'll realize that since options are just legal contracts, they can be created out of nothing before they are traded. You'll also know that one option contract covers 100 shares so you'll need to bear this in mind when it comes to how much capital you wish to invest. You should aim to purchase multiples of 100 shares?

The best way to illustrate how to use options when bottom fishing stocks, in order to buy them at a discount and thus give yourself a serious advantage is to use an imaginary example.

Let's say a company stock price has recently fallen dramatically to around $17 along with a very large volume bar on your stock chart. This is sometimes referred to as 'capitulation volume'. The stock has since been trading in a price range and as a "bottom fisher" you can see that it is ready to turn around.

You know that if the price falls to $15, then at that price it is a good time to buy the stock . For the purpose of this example you also have sufficient capital to purchase 500 shares.

This is what you do:

You sell to open 5 put option contracts at an exercise price of $15 for expiration next month and also buy a further 5 put option contracts at a lower exercise price, but same expiration date. This is called a put credit spread, Market professionals call this a "bull put spread".

You need the bought position as a kind of insurance in case the stock plummets further. You will receive a net credit to your brokerage account. Once this is done, three possible scenarios can follow:

1. The stock stays above $15 by option expiration date. In this case you get to keep the credit you have received and can choose to write another put credit spread for the following month. You have effectively been paid for waiting for the stock to reach your planned purchase level.

2. The stock falls to $15 and you are exercised on your sold options and the stock is "put" to you. You now own 500 shares in this company. Now you can implement more options strategies, such as "insuring" your 500 shares by buying put options. Or just wait for the stock price to rebound and take profits.

If the stock price moves north, then future month put options for your purchased shares will be much cheaper. Or you may wish to raise the strike price of future puts to lock in profits.

3. The stock plummets further to way below $15. In this case, 500 shares will be assigned to you, but your bought puts will also have increased in value and limit any potential unrealized losses on the stock.

You could cash in the profit from these bought puts and use most of it to buy more of these shares and in doing so, average down your entry price without spending any more money as part of a longer term wealth building plan.

You would use the remaining portion to finance further put options to insure the stock price against falling.

Either way, the credit you received from your bull put spread, will offset the cost of the 500 shares.

Bottom Fishing Stocks Using Inflated Option Prices

One of the reasons why the bottom fishing principle is the best time to sell put options to buy shares at a discount, is that due to the huge stock selloff, the implied volatility in put option prices will normally be high.

This means that the near-money options you sell will be at inflated prices, thus bringing you a greater net credit for the transaction.

You get paid a handsome sum for simply waiting for the stock to fall further. If it doesn't, you win. If it does fall further, you can still win.

Another Huge Advantage

Instead of creating a vertical put credit spread for bottom fishing stocks as we've already outlined, you could choose instead to make it a diagonal spread. This means that you would sell the near month put option and buy a long dated put option at a lower strike price.

You may be exercised on the near month option and own the 500 shares, but you will also now have a long dated put option at a lower strike price above which you can sell more put options each month, or under which you can create a put debit spread, bringing you even more income.

Worked examples of the Bottom Fishing strategy along with so many more powerful secrets about the art of adjustments for stock and option trading profits are outlined in the very popular Options Trading Pro System.