5 Rules for Making Big Profits Shorting Stocks
Michael Shulman, July 29, 2009
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One put option contract represents 100 shares of the underlying stock, so if you see an option trading at $3, your investment would be $300 for a contract. If that stock heads off a cliff and your put shoots up in value to $6, that's a sweet money-doubler. But if you buy an option at $2 and it goes up to $6, you've effectively tripled your money. And if you're going to go for gains, why not go for the biggest ones possible?
I have avoided some short-side positions because the premiums on the puts were simply too expensive, making the risk/reward ratio unfavorable. The lower the put entry price, the more money you can make when it turns in your favor. And if things don't go your way, then that's less money you put at risk.
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