How to Survive “Fire Weather” in a Stock

You can repair your fallen stocks. [Logo]( How to Survive “Fire Weather” in a Stock Dear Reader, Hello… Costas (“C-Bo”) Bocelli here. As I write these words, the tourist town of Lahaina on the Hawaiian island of Maui is on fire. At least 36 people have died and rescuers are pulling people from the sea, where they had jumped to escape the blaze. Costas Bocelli True Market Insiders According to CBS News, "Certain weather can ignite and help spread fires, with strong winds, low relative humidity, unstable atmospheric conditions and thunderstorms contributing to what meteorologists call "fire weather." Our thoughts and prayers are with the victims, their families, and with the firefighters and other responders doing their utmost during this very trying time. When I see stories like what we're seeing in Maui, I feel relieved that even on a bad day in the stock market, it's "only money" that's at risk. Of course, that's not to minimize the impact a bad trade can have on your account, your retirement, your peace of mind, and your family's financial future. Investing is serious business, no matter the size of your portfolio. Losses are real and they hurt, no matter who you are. (That's why risk management – how you invest – is by far the most important part of your trading approach.) I don't have to tell you the market can fall, and quickly. So can an individual stock. In fact, just days ago (August 4), Fortinet, Inc. (FTNT) fell an astounding 25% after the company released a disappointing second-quarter earnings report. If this stock is in your portfolio, you might be shaking your head in stunned disbelief. But take heart… I'm going to show you a way to repair the damage to this position. I call it my "duct tape repair" strategy, and it's one of the very cool moves I teach you in Options Soup, the top-shelf education program I created along with Chris Rowe. I'm telling you about this strategy now, because I know that some of my readers have exposure to FTNT or other stocks that suffered a precipitous plunge. And I also know that when a stock swoons the way this one did, your first instinct might be to… DOUBLE DOWN, right? But doubling down is a double-edged sword. On the one hand, it lowers the cost basis of the investment. You can buy more stock at a lower price and average down. On the other hand, you raise your risk. You essentially create a bigger position and expose yourself to even greater losses to the downside. I can't tell you how many investors have gone broke by doubling down after a stock just suffered a steep decline. My method will help get you "whole again" or even turn a profit without adding any more risk. It's a powerful technique that incorporates options along with your existing stock position. It's called a Ratio Vertical Spread. Don't let the name throw you. The strategy is quite simple and easy to learn. It's particularly useful when a long stock position has sold off (like FTNT just did) and when you're reluctant to sell and hoping the price will rebound. Best of all, the technique carries minimal risk and, if structured properly, it can be put on for free or at a very minimal cost. In fact, the example we'll use to repair a FTNT stock position actually allows you to collect a cash payment. Now how cool is that?     When used as a repair strategy for a long stock position, the Ratio Vertical Spread simply entails buying ONE out-of-the-money Call and selling TWO higher-strike out-of-the-money Calls against it. You'll want to do this in the same expiration date (preferably 2-6 months out) while maintaining the proper ratio. The proper ratio is: For every 100 shares of long stock you wish to repair, you'll buy one Call option at the lower strike, and sell two Call options at the higher strike. FTNT was recently trading at $58.80 per share. Even though you're short that extra Call option contract, you're still completely covered by the long stock position. So the total position is fully hedged. So let's take a look at Fortinet (FTNT), the cyber security company that saw its stock get smacked down. To put on the repair strategy, you can BUY the FTNT December 65 Call for a $3.00 debit… While at the same time you SELL two of the FTNT December 70 Call for $1.70 credit each. Since we're selling two of these, that's a $3.40 credit. In other words, the trade sets up for a small credit – you collect $0.40 or a $40 credit for every 100 shares you need to repair. Here's another look at that price chart… If FTNT is at or above $70 per share at December expiration, your effective exit is $75 per share -- the level it was trading before the earnings plunge (the green arrow). So you were able to add leverage at no additional cost (in fact, we actually got paid to grab the extra leverage). Now, if the stock doesn't rally back up... well, then you're essentially in the same position as when you put on the trade. But you'll have incurred no additional losses from the option trade, because you'll have laid out nothing to buy the 1x2 ratio spread. And you get to keep the small credit to boot. You will face an opportunity cost, though. Should the stock really take off and soar even higher, beyond the higher strike where you sold the Calls, your gains will be capped at that point and your stock position will be called away. But hey, remember: This is a repair strategy. You use it when you find it hard to cut a position loose, feel stuck, or have the urge to double down. Got options? You should! Thanks for reading, and I'll see you soon.   [Let’s Discuss My Favorite Topic…]( [Here’s How to Play the Next Trillion-Dollar Company]( [On Fire But Going Higher](   [YouTube]( [Facebook]( [Twitter]( [Instagram]( [LinkedIn]( DISCLAIMER ©2023 by True Market Insiders, LLC, Protected by copyright laws of the United States and international treaties. This Newsletter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of: True Market Insiders, 7901 4th St. N STE 6113 St. Petersburg, FL 33702. The information contained herein has been prepared without regard to any particular investor's investment objectives, financial situation, and needs. 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