Winning Option Trading Strategies in a Bear Market

Most people lose money in 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 No. 1 - Buying Put Options
It is fairly easy to purchase put options. This option trading strategy can even be used in an IRA account as long as you have been authorized by your broker. 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 No. 2 - Buying 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 No. 3 - Married Put
Risk can be minimized by utilizing a married put, which is a hedging strategy. 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. A popular belief is that there is always a bull market to be found. 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. Alternatively, you could buy a married put on a stock in a sector you believe is going to appreciate, thus minimizing your risk. On top of purchasing options on underlying stocks, one can additionally invest in put options traded on exchange traded funds (ETF's) and broad based market index options. You can invest in global markets, commodities, and even currencies with exchange traded funds. 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.

This article discusses three option strategies to make you big profits and minimize risks during a bear market. It presents buying put options, buying put option spreads and buying married puts..

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 – stock options trading newsletter.

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