One problem with the vanilla style of investing is that it’s nearly impossible to make money when the market goes down. By “vanilla investing,” I mean a situation where you are only long stocks.

To be clear, for more conservative investors whose objective is to earn a solid return from their hard-earned money, just buying quality stocks and holding is totally fine. However, for more active investors who want to make money in up markets and down, some creativity is needed.

Ways to Gain When The Market Falls

Some common ways to make money in a down market are to short sell and to buy inverse exchange-traded funds (ETFs), but they come with drawbacks. For example, when you short a stock, you could be caught up in a short squeeze and suffer a larger loss than you might have otherwise. And when you buy an inverse ETF, due to tracking error—especially if you hold onto the ETF for more than a few weeks—you are likely to make a smaller return than you would expect.

You could also buy put options. But when you are long options, you have to pay a premium and time works against you. You need the underlying security to move enough in a short enough amount of the time for the trade to be profitable.

Alternatively, there’s a strategy that can earn you income and possibly purchase a stock that you like at a price of your choosing. That strategy is put selling.

Why This Strategy Makes Sense

The premium that you get for selling the put is yours to keep no matter what happens with the option. If the option expires, your obligation under the put contract is over. You are free to do whatever next you want. And if the option is exercised, for each contract, you must buy 100 shares of the underlying security at the strike price. However, if you picked the security and strike price wisely, then that could very well work out in your favor.

Read This Story: Earn Cash While Waiting

Consider this example. Let’s say you are bullish on oil and gas, you think oil producers will provide protection against inflation, and you like Exxon Mobil (NYSE: XOM). The market price as of this writing is about $82. You wouldn’t mind buying 100 shares if it fell to $75. You can sell one contract of the May $75 puts at $3.20 and pocket $320 (actual market quote as this writing; ignoring the negligible commission cost).

Assume that you don’t buy back the put to close your position and you hold the put to expiration. If XOM is below $75 at the end of the third week of May, the option simply expires. If XOM is $74, 100 shares will be put to you at $75. However, your cost basis will be adjusted downward by the $320 premium you collected, from $7,500 to $7,180, so even though you bought XOM at an above-market price, you still start out with an unrealized profit.

Of course, if XOM is trading for less than $71.80 when the stock is put to you, then even with the premium you will start out in the red. However, since you like XOM and would have bought XOM at $75 anyway, it’s not the end of the world. Plus, if you are right about XOM, the stock will likely come back and you will be able to sell at a profit later. You can even sell covered calls against your 100 shares and collect additional income that way.

This strategy is especially worth considering if you expect market weakness to be temporary. In other words, even if the stock is put to you, the market (and the stock) should rebound after you get the stock. If you think the market will keep sliding for a long time, shorting would make more sense.

Selling a put does have the major drawback of tying up your money until you either close out the position or the option expires. Your broker will set aside money as a put reserve requirement. In our example, the broke will lock up $7,500. But if the market is falling and you aren’t in a hurry to buy, then having the cash reserved isn’t terrible.

And if you don’t have a large portfolio, this strategy will be limited to low-priced stocks. For example, selling one put contract against a high-priced stock with a $500 strike price will lock up $50,000. You can always use margin to increase your flexibility, but using margin (leverage) will increase risk.

Used properly, the put-selling strategy will allow you to generate income in a down market with the possibility of buying stocks you like at a discount. You can (hopefully) sell these stocks later at a gain. As with any investment strategy, you should consider your own financial situation carefully and see whether the strategy fits your goals and risk tolerance.

When it comes to options trading, one of the shrewdest advisors I know is my colleague Jim Fink.

Jim Fink is chief investment strategist of the elite trading services Options For Income, Velocity Trader, and Jim Fink’s Inner Circle. He has agreed to show 150 smart investors how his “paragon” trading system could help them earn 1,000% gains in just 12 months.

We’ve put together a new presentation to explain how it works. Click here to watch.