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In a bear market, most people lose a lot of money. 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 No. 1 - Buying Put Options Buying put options is fairly easy. If your broker authorizes you, you can use this option trading strategy in an IRA account. You desire to select a stock, which you feel has a good chance of going down in price. 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 No. 2 - Buying Bear Put Spread A put spread is characterized by the trading of two same month expiration put options, buying one at a given strike price and selling the other put option at a strike price lower than the purchased put option. You'll need to stick with stocks whose value you think will be falling. Your risk will be limited to the cost of the put spread. As an example, if we purchase the put option as listed above but also sold a put option with a strike price of $45. In this example, should the stock plunge to $40, you would profit $5 per share ($50 strike price - $45 strike price). And while you are making less per share, your savings comes in the fact that the cost of buying the put option outright would be much higher than the initial cost for the bear put spread. Option Trading Strategy No. 3 - Married Put Buying a married put is an option hedging strategy that can be used to minimize your risk. This strategy entails the purchase of a stock you feel has a good chance of appreciation while at the same time buying a put option aimed at limiting exposure to loss from adverse market changes. You might have heard the saying that there is always a bull market going on somewhere. In order to benefit from this strategy find out what business sectors and securities go against the grain and appreciate in a bear market. Next you buy the stocks you chose and protect your investment by buying a put option to limit your losses if the stock goes south. 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. Alternatively, you could buy a married put on a stock in a sector you believe is going to appreciate, thus minimizing 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. Disclaimer: This article should not be used as financial advice; it is only for informational purposes. Be sure to contact your financial advisor prior to making any decisions on investing.
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Author Biography - Expert option trader John Hart focuses his efforts on developing unique and innovative approaches, strategies and methodologies for option trading. For a limited time, you can sign up to his newsletter absolutely free by clicking on this link – option trading strategies newsletter.
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