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Winning Put Option Trading Strategies in a Bear Market

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
Buying put options is fairly easy. This option trading strategy can even be used in an IRA account as long as you have been authorized by your broker. You want to pick a stock that you believe will be falling in value. Your only risk will be the cost of the put option. For example, stock XYZ is currently trading at $50 per share and you buy a put option on XYZ with an expiration date of two month later with a strike price of $50. If the stock drops from $50 to $40, your put option would be worth $10 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 buying a put option at one strike price and selling another put option at a lower strike price for the same expiration month. You want to pick a stock that you believe will be falling in value. Your risk will be limited to 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 consists of purchasing a stock that you believe will appreciate in value and buying a put option at the same time to minimize any losses due to adverse market movement. You might have heard the saying that there is always a bull market going on somewhere. 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.

In conclusion, you can still make big profits in bear markets by looking for stocks that you think are going to fall in price and buying a put option or a bear put spread. Another way is to identify the right stock in the right sector that you think is going to appreciate and buying a married put to minimize 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. There are many ways to make big profits in a bear market but it is important to understand the option strategies in detail, select the right stock, exchange traded fund or index option and utilize a proven methodology and approach.

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.

Article Source: http://www.noviceinvesting.com/Article

Author Biography - Expert option trader John Hart focuses his efforts on developing unique and innovative approaches, strategies and methodologies for option trading. For a limited time, you can sign up to his newsletter absolutely free by clicking on this link – stock options trading newsletter.