Profiting in a Bear Market - Three Option Trading Strategies
Most people lose a lot of money during a bear market. Do you remember the tech bubble and recession in 2000-2002? This article will discuss three option trading strategies that can make you big profits in a bear market or recession.
Option Strategy #1: Purchase Put Options Buying put options is fairly easy. This option trading strategy can even be used in an IRA account as long as you have been authorized by your broker. Put options give you the right to sell a stock at a specific price (strike price) on or before a specific date (expiration date). You want to pick a stock that you believe will be falling in value. Your risk will be limited to the cost of the put option. For example, stock XYZ is currently trading at $50 per share and you buy a put option on XYZ with an expiration date of two month later with a strike price of $50. If the stock drops from $50 to $40, your put option would be worth $10 per share.
Option Trading Strategy #2 : Purchase Bear Put Spread Buying a put spread is a little more complicated than just buying a put option but gives you the benefit of reducing your cost but caps your profit. A put spread is buying a put option at one strike price and selling another put option at a lower strike price for the same expiration month. You want to pick a stock that you believe will be falling in value. Your risk will be limited to the cost of the put spread. For example, buy the put option listed above and sell a put option at a strike price of $45. In this case, if the stock dropped to $40, you would make $5 per share (strike price of $50 minus strike price of $45). Even though you make less per share, the initial cost for the bear put spread would be lower than just buying the put option.
Option Trading Strategy #3: Married Put Buying a married put is an option hedging strategy that can be used to minimize your risk. This strategy consists of purchasing a stock that you believe will appreciate in value and buying a put option at the same time to minimize any losses due to adverse market movement. You might have heard the saying that there is always a bull market going on somewhere. So, to effectively use this strategy, you first identify the sectors and stocks that are defying the odds and appreciating in a bear market. Then, you purchase those stocks and at the same time buy a put option to protect yourself from any adverse market movement.
In conclusion, you can still make big profits in bear markets by looking for stocks that you think are going to fall in price and buying a put option or a bear put spread. Another way is to identify the right stock in the right sector that you think is going to appreciate and buying a married put to minimize your risk. In addition to buying options on stocks, you can also buy put options on exchange traded funds or index options. Exchange traded funds let you invest in global markets, commodities and even currencies. There are many ways to make big profits in a bear market but it is important to understand the option strategies in detail, select the right stock, exchange traded fund or index option and utilize a proven methodology and approach.
About Author
Disclaimer: This article is for educational purposes only and should not be construed as financial advice. You should contact your financial adviser before making any investment decisions.
Jonathon Hartman is an accomplished option trader, focusing on developing innovative and unique option trading strategies, approaches and methodologies. For a limited time, you can sign up to his newsletter absolutely free by clicking on this link - option trading newsletter