Bear Market Equity Options Methods
The use of equity options in a bear market is an normal time for them. In general, when stocks are going down they do so at a very quick pace This is exactly the appropriate time to make use of the inherent properties that equity options have. The main disadvantage of stock options is the time premium that one must pay. When stock prices are changing quickly, that makes time much less of a concern. I have outlined several different methods below to take advantage of this stock market condition.
Purchase Puts
This is the simplest method to use. A stock put is simply the right to sell a certain stock at a particular price (called the strike price) before a certain date (the expiration date). It makes common sense to just simply buy a put. Particularly if you already own the stock.
Sell a Call Option
This is often referred to as a naked call. It is simply selling a call on a particular equity. When the equity goes down the value of the call will go to zero, ergo you keep the profit! This can be a little harder employ as there are some regulations that one must coalesce to. The easier method is detailed in the following step.
Sell a Covered Call
In this case the capitalist is simply selling a call on an stock which he or she already owns. There are much less hoops to jump through as far as margin requirements and the like when one own the underlying stock. You may due this if you don't want to sell you stock for a loss, but still make some money before it starts to rebound later.
Buy Index Puts
This is a way to catch the market movement as a whole and in a sense diversify your portfolio. The most popular index options are the S&P 500 options. They are very liquid and have a high volume of trades every day. That my not be the case with individual stocks which can have low option volumes and very high bid to ask spreads.
Employ a Bear Put Spread
This is a more advanced option strategy, but it has the benefit of reducing your risk. A bear put spread is when an investor purchases a put at a particular strike price (say 55) and sells a corresponding put at a lower strike price (say 45). Both options should be for the same month. Otherwise you are placing what is called a bearish calender spread. You would use this gameplan if you believe the stock in this case will fall below 55 but remain above 45. This is for use in more somewhat downward trending markets.
Conclusion
These are just several of the many great ways to make money using stock options in a down market. Option trading is of course risky and is not for everyone. However, if used properly can enhance the performance of your stock portfolio greatly.
Purchase Puts
This is the simplest method to use. A stock put is simply the right to sell a certain stock at a particular price (called the strike price) before a certain date (the expiration date). It makes common sense to just simply buy a put. Particularly if you already own the stock.
Sell a Call Option
This is often referred to as a naked call. It is simply selling a call on a particular equity. When the equity goes down the value of the call will go to zero, ergo you keep the profit! This can be a little harder employ as there are some regulations that one must coalesce to. The easier method is detailed in the following step.
Sell a Covered Call
In this case the capitalist is simply selling a call on an stock which he or she already owns. There are much less hoops to jump through as far as margin requirements and the like when one own the underlying stock. You may due this if you don't want to sell you stock for a loss, but still make some money before it starts to rebound later.
Buy Index Puts
This is a way to catch the market movement as a whole and in a sense diversify your portfolio. The most popular index options are the S&P 500 options. They are very liquid and have a high volume of trades every day. That my not be the case with individual stocks which can have low option volumes and very high bid to ask spreads.
Employ a Bear Put Spread
This is a more advanced option strategy, but it has the benefit of reducing your risk. A bear put spread is when an investor purchases a put at a particular strike price (say 55) and sells a corresponding put at a lower strike price (say 45). Both options should be for the same month. Otherwise you are placing what is called a bearish calender spread. You would use this gameplan if you believe the stock in this case will fall below 55 but remain above 45. This is for use in more somewhat downward trending markets.
Conclusion
These are just several of the many great ways to make money using stock options in a down market. Option trading is of course risky and is not for everyone. However, if used properly can enhance the performance of your stock portfolio greatly.
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