Option Trading Strategies: Three Ways to Profit in a Bear Market by Jonathon Hartman

In a bear market, most people lose a lot of money. Are you cognizant of the bursting tech bubble and consequent recession circa 2001-2002? In this article, we will be covering three option trading strategies for a recession or a bear market, which will allow you to maximize profits rather than lose money.

Option Strategy No. 1 - Buying Put Options
It is fairly easy to purchase put options. If your broker authorizes you, you can use this option trading strategy in an IRA account. There is a stock falling in value that you want to pick. You desire to select a stock, which you feel has a good chance of going down in price. Your only risk will be the cost of the put option. As an example, assume that stock XYZ trades now for $50 a share and you purchase a put option on that same stock with expiration two months out and a strike price of $50. If the stock decreases in value from fifty to forty dollars, your put option would be valued at ten dollars per share.

Option Trading Strategy No. 2 - Buying Bear Put Spread
This strategy entails buying a bear put spread, which is a bit more complex and limiting to profits than an outright purchase of a put option, but it gives the buyer the benefit of reduced cost basis. A put spread is characterized by the trading of two same month expiration put options, buying one at a given strike price and selling the other put option at a strike price lower than the purchased put option. You'll need to stick with stocks whose value you think will be falling. There is a limited risk to you with the cost of the put spread. As an example, if we purchase the put option as listed above but also sold a put option with a strike price of $45. In this example, should the stock plunge to $40, you would profit $5 per share ($50 strike price - $45 strike price). And while you are making less per share, your savings comes in the fact that the cost of buying the put option outright would be much higher than the initial cost for the bear put spread.

Option Trading Strategy No. 3 - Married Put
Risk can be minimized by utilizing a married put, which is a hedging strategy. This strategy entails the purchase of a stock you feel has a good chance of appreciation while at the same time buying a put option aimed at limiting exposure to loss from adverse market changes. A popular belief is that there is always a bull market to be found. In order to benefit from this strategy find out what business sectors and securities go against the grain and appreciate in a bear market. Next you buy the stocks you chose and protect your investment by buying a put option to limit your losses if the stock goes south.

To conclude, significant profits are still attainable in bear markets by seeking out stocks you feel will decrease in price and buying a put option or bearish 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. It is possible to receive a large profit in a bear market. However, it is vital to comprehend the details of the option strategies, choose the correct stock, exchange traded fund or index option, and make use of a proven tactic and begin.

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.

About the Author

Accomplished option trader John Hart focuses his efforts on developing unique and innovative approaches, strategies and methodologies for option trading. His option trading newsletter is available free of charge for a limited time only, so check it out using this link - option trading newsletter .