When the market is bearish and facing a downturn, experienced investors consider it better to buy and invest in stocks. In general, when the market is falling, most investors show typical behavior when they start selling their stocks.
This is where a bearish options strategy can help you make profits even when the market is falling. As an investor, you have to make the most of this opportunity. With the help of the options trading strategy, you must take advantage when the prices fall.
Therefore, if you read this guide, you will be able to understand the major strategies that you can use to profit in a falling market.
Profiting in a Bearish Market: How Is It Possible?
Trading stock options when the market is bearish is a contrarian approach in stock-market investing. Basically, according to this approach, when the markets are falling, it is a great time for investors to potentially make profits by buying securities.
However, investors do not just go ahead and buy stocks without any proper planning. For instance, many investors make use of options trading strategies to make their move in a bearish market. Hence, this way of buying stocks is also known as a bearish options strategy.
If you look at things from a historical point of view, it is quite profitable when you buy stocks during a falling market. Despite that, many risk-averse investors are reluctant to make such moves.
Apart from that, if you are looking for a good alternative to buying stocks, you can also sell your put options. Generally, you will profit by selling options in highly volatile bear markets, which is not usually possible.
So, if you do not have a lot of experience, you must only sell puts on your stocks that you want to own in the long run.
Interestingly, this strategy is so successful that even for the SPX chart (S&P 500), you can trade put-selling exchange-traded funds (ETFs).
What Strategies to Use to Make Profits in a Falling Market?
If you want to make profits in a bearish market, you can make use of the following bearish options strategies:
1. Bear Call Spread
In this bearish options strategy, you purchase and sell a call option. Basically, this option comes at a lower strike price than the underlying asset and the same expiry date.
Here, you simultaneously sell a call option and buy a call option at a higher strike price. However, both need to have the same expiry date. The limits of profits and losses depend on the strike prices of your call options.
Generally, experienced investors consider this a limited risk and limited reward strategy. This is because, as a trader, you will be able to contain your losses or realize a reduction in profits if you use this strategy.
2. Bear Put Spread
This strategy also comes with limited risk and limited profit. Basically, you can use this if you see a moderate decline in the price of the underlying asset.
Here, you can achieve the profit after buying a higher strike put and selling a lower strike put; both have the same expiry date. However, the strike prices in both cases are different from each other.
Hence, if you want to maximize profit and minimize losses, this is a good strategy to implement.
In this case, the main advantage is that there is a reduction in your trading risk. Once you sell the put option with a lower strike price, it helps to offset the cost of purchasing the put option with a higher strike price.
3. The Strip Strategy
This is a market-neutral strategy that you use in a bearish market. Basically, it pays relatively more when the price of the underlying asset declines. Here, you have to buy one at-the-money call option, and two at-the-money put options on the same underlying asset. Just like before, both need to have the same expiry date.
Hence, when there is a significant decline in the price of the asset, you can use this strategy effectively while you take a look at the SPX live chart. In fact, it has the potential to make unlimited profits if there is a dramatic fall in price.
Moreover, this is also a limited risk strategy. Here, the maximum potential loss that you can incur is up to the premium you pay for the options. Therefore, you do not incur more loss than what you pay for the initial cost while implementing the strategy.
4. Long Put Butterfly Spread
Although it is not a common strategy, it actually works if you want to implement an effective bearish strategy. Here, you combine the bull and bear spreads strategies. Your goal is to create a position where there is less risk but there exists a certain cap of the profit potential.
Hence, if you are expecting less price movement in the underlying asset, this strategy is ideal for you. Primarily, you do not assume the price of the asset to go up or down.
Basically, you have to trade four options contracts, out of which three have different strike prices. In all these cases, the expiration date must be the same.
So, when you are using the long butterfly spread method, you buy one call option at a lower strike price. On the other hand, you sell two call options at a mid-range strike price and, finally, buy another call option at a higher strike price than your underlying asset.
5. Synthetic Put
In the synthetic put options strategy, you have to combine a short stock position with a long call option. In fact, you must use this combination on the same stock. Thereby, you mimic a long-put option. This is known as a synthetic long-put strategy.
Basically, if you have a short position in a stock, you can purchase an at-the-money call option on the same stock. Hence, by taking this action, you create a protection against the stock price’s appreciation.
Analyze Your Options!
If you analyze the history of markets, you will understand that buying stocks during a bearish market is a good thing. However, some investors do not want to risk their money when the market is in a panic.
Hence, if you do not want to buy in a bearish market, use the above strategies to benefit while you buy stocks.
