Bearish Options Trading Strategies for Falling Markets

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The typical behaviour of investors and traders is to sell securities in panic when a bear market prevails. However, if investors effectively use bearish options strategies, they may potentially turn profits out of their investment in falling markets.

A lesson that some clever investors have learned over years of trading and investing is that a potentially optimal time to buy and invest in a stock is during a market downturn. When a market is falling (bearish market), may be a period of buying rather than the typical selling behaviour that exists in bearish markets. Bearish options strategies may pose a potentially profitable way to trade in a bear market, and investors get many opportunities to take advantage of such a time, especially with online stock market trading.

Article Highlights

  • Bearish Options Strategies
  • Options Strategies to Use in Bear Markets

Bearish Options Strategies

One of the most contrarian approaches to stock trading and buying shares is the view that investors can potentially make profits if they buy securities when the markets are falling or are in a bearish state. When there is a market downturn, investors don’t just go ahead and buy shares without some strategic planning involved. They may consider options trading strategies to use and as they are employing these in a bearish market, they are referred to as bearish options strategies.

Bearish options strategies arise from strategies that are commonly used for trading futures and options in the market. The positive thing about options trading strategies is that options allow investors and traders to trade in different market price directions. So, when any investor predicts that an underlying asset price will drop, they may use bearish strategies after determining how much the price will decrease and the period in which it will move downward. The easiest way to take advantage of falling prices in the stock market is to initiate a buy-put strategy. Nonetheless, this is by far, not the only strategy you may use, and others may come in handy too. Exploring different options strategies in a bearish market may be worth an investor’s while.

Options Strategies to Use in Bear Markets

Some of the strategies used for futures and options trading come into play in bearish markets. Here are some key options strategies for the bear market:

  • The Bear Call Spread

This is a strategy that involves buying and selling a Call Option that has a lesser strike price on the identical underlying asset and the date of expiry. When investors sell a call option, they are rewarded with the premium. When investors purchase a call option, they are compensated, again, with a premium. In this scenario, the cost of investment is reduced. Additionally, this is a low-risk technique as the any gain is restricted to the premium. The strategy is commonly applied when trader feel the underlying price of an asset will drop moderately.

  • The Bear Put Spread

In bearish options strategies, the bear put spread is also used to hedge against loss and make potential profit. Here, investors have to purchase an in-the-money (higher) put option and sell an out-of-the-money (lower) put option on the very same company which has the same date of expiry. The overall impact of this strategy is to lessen the expense of purchasing a put and increase the breakeven point (the Long Put). As the investor only makes some profit if the price of a stock or an index falls, this approach has to have a bearish perspective. This technique results in low risk but low profit as well.

  • The Strip

The strip options strategy is a bearish strategy that has a robust bias towards bearish markets and is used when there is a volatility in the market. In bearish strategies, the strip works along the lines of a net debit approach. This is a slightly modified version of the long straddle. By adding a minor tweak, investors go long on put with one more lot as there is a bearish bias involved. In the long strap, investors are long on ATM call and put option with equal lots. Here, the maximum profit can be realised. Nonetheless, if the underlying price of the asset closes at the strike price of the call and put bought, the maximum degree of loss will have to be incurred.

Strategies to Win in Markets

Options strategies for the bear market are used by investors when they believe that the price of an underlying asset in an options contract will drop. Using this as a starting point, bearish strategies may be employed so investors benefit from the decline in prices and see some profit, if not an optimal amount. Using any options strategy requires a sound understanding of options trading and investment and investors can potentially use these if they are well-informed. 

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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