Bear Market Stock Option Strategies

The use of stock options in a downward moving market is an optimal time for them. In general, when equities are going downward they do so at a very quick pace This is exactly the best time to make use of the inherent properties that equity options have. The main problem of stock options is the time value that one must pay. When stock prices are changing swiftly, that makes time much less of a issue. I have outlined several methods below to take advantage of this market condition.

Purchase Puts

This is the easiest tactic to use. A stock put is simply the right to sell a certain stock at a particular price (named the strike price) before a certain date (the expiration date). It makes perfect 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 astock. When the equity goes downward the value of the call will go to nothing, therefore you keep the benefit! This can be a little harder employ as there are some regulations that one must coalesce to. The easier method is outlined in the next step.

Sell a Covered Call

In this case the capitalist is simply selling a call on an stock which he or she presently owns. There are much less hoops to jump through as far as margin requirements and the like when you own the underlying stock. One may due this if you don't want to get rid of you equity for a loss, but still make some profit 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 standard 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 equities 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 individual buys a put at a particular strike price (say 55) and sells a corresponding put at a lower strike price (say 45). Both stock options should be for the same month. Otherwise you are placing what is called a bearish calender spread. You could use this strategy if you believe the equity in this case will fall below 55 but remain above 45. This is for use in more moderately down trending markets.

Conclusion

These are just several of the many good ways to make money using options in a down market. Option trading is of course risky and is not for all. However, if used properly can enhance the performance of your amass portfolio greatly.