I Am a Perma-Bull

In case you have missed the latest development in business news, Bear Stearns Companies Inc has brokered a deal with JP Morgan Chase to be purchased for $2 per share. At the start of 2008 the stock was trading at $88 per share. This deal is expected to rock the global financial markets and completely crush the stock price of the financial firms. It is likely to be very ugly.

On the flips side of this pain there are two great ways to find profit. First and the method I plan to take advantage of is to continue to invest into the broad market indexes and dollar cost average more money into the market. This route will profit when the market recovers.

The other way to profit from this situation is to delve into more complex investment concepts like options or short sales. I personally tried to buy put options on BSC (Bear Stearns ticker symbol) this evening. Unfortunately my broker requires an additional signature on paper in order to add options trading to my account. With a small investment (and a high level of risk) an outsized profit can be created from large drops like Bear is certain to experience tomorrow.

This post is not intended to a complete primer on options, but briefly a "put" option is the right to sell a security at a given price during a fixed period of time. What that means is that the purchase of a put option is a bet that the price of a security will fall. As of Friday's closing price BVDOE.X is a BSC put option with an exercise price of $25 and March 19th expiration. These options are priced at $4.10. That means to make a profit the stock would need to fall below $20.90 ($25 - $4.10) before March 19th. If the Bear falls to the $3 range I would predict, one $4.10 investment could generate a $17 profit. That is a pretty sweet return for one day, but as the market opens it is almost certain that the cost of the options will skyrocket and remove most of that potential return for everyone but the fastest movers.

I do not endorse this specific investment for all people in all situations! It is important to note that options are a risky business and there is a decent chance that your entire investment can be lost. If the stock does not go below the $25 strike price the entire investment is worth nothing. Also, it is important to note that these prices and estimates are approximate and the product of my personal analysis, be sure to do your own analysis before investing. All of that said, $4,100 invested at Fridays closing price could turn into $17,000 in a single day. Wow!

I'm a bit bummed that the market is likely to tank but it is important to know that there are always ways to make money. Keep investing in the market and in the long run you won't regret your steadfast decision. For more information about these topics I recommend more reading:

Bear Stearns Options at Yahoo Finance
Market Watch News Coverage of BSC
Investopedia Options and Futures Articles