While our main way to help you, our Profit Catalyst Alert subscribers, make money is by recommending long positions in stocks, we also recognize you are sophisticated investors who understand there are ways to profit when stock prices fall.

And you may know, I spent the first 24 years of my Wall Street career as a short seller, which is one way to profit from falling prices. In its simplest form, short selling is selling a stock that you’ve borrowed, and If the price drops, you buy the stock back at a lower price, return it to the lender and pocket the difference.

I worked for a hedge fund whose mission was to find companies with deteriorating businesses and profit when their stocks dropped. Despite the market’s general tendency to go up, that hedge fund performed better than its peers in 15 of our 18 years together. We profited from betting against stocks such as Forward Industries, a manufacturer of cellphone cases whose stock dropped 80% while we were short, and educational toy company LeapFrog, whose stock collapsed 74% when stores were flooded with electronic toys. After 18 years with that hedge fund, I went on to write research reports for other hedge funds on stocks to short.

I became adept at finding holes in companies’ strategies and detecting short-lived trends that temporarily boost earnings. Astute short sellers must also be accounting detectives and adroit analysts of management’s dialogue and even body language.

Now I’ll be sharing that expertise with Profit Catalyst Alert subscribers.

However, short selling is a risky business. Betting that stocks will decline is a rough road, full of unexpected potholes and torturous turns. Market declines tend to be severe and brief so that a successful short seller cannot base his strategy on a weak stock market. Each individual stock must exhibit some problem that would push the share price lower.

In addition, the loss on a short sale is unlimited. If you buy a stock and then bet on its decline, your loss is limited to the price you paid for the stock. Hypothetically, if it went to zero, you would lose the total amount of your purchase. If you sell a stock short, there is no limit to your losses.

A safer way to profit from a stock’s decline is puts, and I’ll be recommending puts in the near future.

In addition to the explanations that I offer here, I direct subscribers to the Options Trading Guide that can be found under the Resources tab on the Profit Catalyst Alert website. This is an excellent reference, with detailed and easy-to-understand explanations of the mechanics of options.

A put is a stock option. Options are often called derivatives in that they derive their value from an underlying asset, in this case the price of a stock. Each option contract represents the right to buy or sell 100 shares of that underlying stock at a predetermined price (strike price) until a certain date (expiration, which is usually the third Friday of a month). The expiration can be as soon as next month or as distant as two and a half years away. An option’s profitability depends on correctly predicting the direction that the underlying stock’s price will take over a particular period.

A put is the option to sell the underlying stock at a predetermined price.  The put buyer has the right to sell shares at the strike price, and the put writer (or the person who sold you the put) is obliged to buy at that price.

If a stock drops after you have purchased a put, the price of that option will rise, typically in proportion to the magnitude of the price drop. There are several other measures that drive the value of an option, but I will be focusing on the price change of the underlying security.

For example, I’ve been eyeing Shutterstock, the purveyor of digital photos. News of a joint venture with Google sent the share price up 33%. After digging through transcripts and Securities and Exchange Commission filings, I came away skeptical that the profits would be as high as investors hoped. The stock tanked 5% a few days later when it was revealed that Shutterstock’s chief technology officer had resigned the day before the Google deal was signed.

That was an odd, confidence-draining event that supported the theory that the news might not have been as good as investors first thought.

The August 52.5 puts, which sold for $2.73 the day before the CTO’s resignation became public knowledge (the stock was $55 at the time), rose 24% in one day.

I’ll also be recommending some calls to leverage stocks I believe have the strongest chances of advancing quickly.

A call is the option to buy the underlying stock at a predetermined price by a certain date. If the call buyer decides to buy the stock—an act known as exercising the option—the call writer is obliged to sell his shares to the call buyer at the strike price.

Rest assured, I will go into much more detail when recommending these trades, and I will guide you through the process.