Option Strategies For A Down Market

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If you are going to be an options trader, bear markets and market crashes are realities that cannot be avoided. While alot of options traders cringe at the idea of a bear market or market crash, real options traders actually celebrate it and the elite few actually make their fortunes during those times. Yes, you may be surprised to know that bear markets or market crashes are actually the best times to make money through options trading!

In fact, utilizing the exact same options strategies, you will more often than not make significantly more profit during a bear market or market crash than during a bear market option trading strategies bullish trending market. In fact, you might be able to return more than 5 times the normal profit on some options strategies during bear markets! Why is that so? OppiE, Author of Optiontradingpedia. Higher Volatility Increases Directional Profits! Bear market option trading strategies, the expectation of greater stock price volatility actually makes options more valuable because such a possibility increases the chances of making a greater profit through options.

Conversely, when a stock is expected to be stable without any big movements in the near future, its implied volatility drops and therefore its value even without any movement in the price of the underlying stock.

As such, all else equal, you are always going to make more profit buying a put option during a bear market than a call option during a bull market on the exact same amount moved on the underlying stock because of this factor. Why is this so? That's because Implied Volatilitydefined by the options greek Vega, tends to surge strongly during bear markets, lifting the extrinsic value of all options and tends to drop drastically, depressing the extrinsic value of all options during bull markets!

Stock prices are more volatile and more expected to make bigger moves than they do in stable bull markets. Higher Volatility Increases Spread Profits! If you are a bear market option trading strategies of collecting extrinsic value through credit spreads or other such bear market option trading strategies writing based options strategiesyou would no doubt experience a sometimes dramatic increase in profitabilty when such options strategies are executed during a bear market or market crash.

In fact, my favorite calendar spread returned about 5 times more profit in than it did in or before. That is again due to higher volatility lifting the Implied Volatility of options resulting in higher extrinsic values. So if your options strategy revolves around collecting extrinsic value, then you would no doubt experience increased profitability during bear market due to the increased extrinsic value through an increased Implied Volatility, no rocket science there.

Bear Markets Move Fast and Hard! Ever heard the saying that "Bulls take the stairs while Bears jump out of the window? Yes, stocks typically decline in value much much faster than it gains them. In fact, every market crash has been able to oliterate stock value that took years to build bear market option trading strategies within just a relatively short period of time.

The market crash took away in just one year all of the value build up over the 4 years preceding the crash.

Looking at this phenomena from an options trader's point of view, this also means that a move that previously took months to complete during a bull market could take bear market option trading strategies weeks or days to complete in the other direction using put options, making more profit within a shorter period of time especially if you are pursuing a directional based options strategy or even simply going long put.

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When your outlook on an underlying security is bearish, meaning you expect it to fall in price, you will want to be using suitable trading strategies. A lot of beginner options traders believe that the best way to generate profits from an underlying security falling in price is simply to buy puts, but this isn't necessarily the case.

Buying puts isn't a great idea if you are only expecting a small price reduction in a financial instrument, and you have no protection if the price of that financial instrument doesn't move or goes up instead. There are strategies that you can use to overcome such problems, and many of them also offer other advantages. On this page we discuss the benefits of using bearish options trading strategies, and some of the disadvantages too. We also provide a list of the ones that are most commonly used.

First, we should point out that purchasing puts is indeed a bearish options trading strategy itself, and there are times when the right thing to do is to simply buy puts based on an underlying security that you expect to fall in price. However, this approach is limited in a number of ways. A single holding of puts could possibly expire worthless if the underlying security doesn't move in price, meaning that the money you spent on them would be lost and you would make no return.

The negative effect of time decay on holding options contracts means that you'll need the underlying security to move a certain amount just to break even, and even further if you are to generate a profit. Therefore, buying puts options is unlikely to be the best strategy if you are anticipating only a small drop in price of the underlying security, and there are other downsides too.

This isn't to say that you should never simply buy puts, but you should be aware of how some of the downsides can be avoided through the use of alternative strategies. There is a range of trading strategies suitable for a bearish outlook, and each one is constructed in a different way to offer certain advantages.

An important aspect of successful trading is to match a suitable strategy to whatever it is you are trying to achieve on any given trade. Doing this would also help you offset some of the risk of time decay. Another way to reduce the negative effect of time decay would be to include the writing of calls. You can even use strategies that return you an initial upfront payment credit spreads instead of the debit spreads that have an upfront cost.

Basically, bearish options trading strategies are very versatile. By using the appropriate one you cann't only profit from the price of the underlying security falling, but you also have an element of control over certain aspects of a trade like the exposure to risk or the level of investment required.

Although there are clear advantages to using bearish options trading strategies other than simply buying puts, you should be aware that there are some disadvantages too. Most of them usually involve a trade off in some way, in that there's essentially a price to pay for any benefit you gain. For example, most of them have limited profit potential; which is in contrast to buying puts where you are limited only by how much the underlying security can fall in price.

While this isn't necessarily a huge problem, because it's reasonably rare for a financial instrument to drop dramatically in price in a relatively short period of time, it does highlight that to get an extra benefit such as limited risk you have to make a sacrifice such as limited profit. In some respects, the fact that there are a number of different strategies to choose from is a disadvantage in itself. Although it's ultimately a good thing that you have a selection to choose from, it's also something of an extra complication, because it takes extra time and effort to decide which is the best one for any particular situation.

Also, because most of them involve creating spreads, that require multiple transactions, you will have to pay more in commissions.

In truth, though, these disadvantages are fairly minor and far outweighed by the positives. The fact is if you can become familiar with all the various strategies and adept at choosing which ones to use and when, then you stand a very good chance of being a successful trader. Below is a list of the more frequently used strategies that are suitable for when you have a bearish outlook.

There's also some brief information about each one: You can get more detailed information on each one of these by clicking on the relevant link. If you would like additional help in choosing a strategy, then you can use our selection tool which you can find here.

This is a single position strategy that involves only one transaction. It's suitable for beginners and comes with an upfront cost.

Only one transaction is required for this single position strategy, and it produces an upfront credit. It isn't suitable for beginners. This simple strategy is perfectly suitable for beginners. It involves two transactions, which are combined to create a debit spread. This is relatively straightforward strategy, but it requires a high trading level so it isn't really suitable for beginners.

A credit spread is created using two transactions. This is complex and not suitable for beginners. It requires two transactions and can create either a debit spread or credit spread, depending on the ratio of options bought to options written.

Short Bear Ratio Spread. This is fairly complicated and not ideal for beginners. A credit spread is created and two transactions are involved. The bear butterfly spread has two variations: It's not suitable for beginners; it requires three transactions and creates a debit spread. Bear Put Ladder Spread. This requires three transactions to create a debit spread. It's not suitable for beginners due to its complexities. Bearish Market Trading Strategies When your outlook on an underlying security is bearish, meaning you expect it to fall in price, you will want to be using suitable trading strategies.

Section Contents Quick Links. Disadvantages of Bearish Strategies Although there are clear advantages to using bearish options trading strategies other than simply buying puts, you should be aware that there are some disadvantages too. List of Bearish Strategies Below is a list of the more frequently used strategies that are suitable for when you have a bearish outlook. Long Put This is a single position strategy that involves only one transaction.

Short Call Only one transaction is required for this single position strategy, and it produces an upfront credit. Bear Put Spread This simple strategy is perfectly suitable for beginners. Bear Call Spread This is relatively straightforward strategy, but it requires a high trading level so it isn't really suitable for beginners. Bear Ratio Spread This is complex and not suitable for beginners.

Short Bear Ratio Spread This is fairly complicated and not ideal for beginners. Bear Butterfly Spread The bear butterfly spread has two variations: Bear Put Ladder Spread This requires three transactions to create a debit spread. Read Review Visit Broker.