Technically a bear market is entered when prices have fallen 20% from the top. The bull and bear symbols are derived from the fighting stance of the animals. A bull raises his horns while a bear swings down to pummel foes.
Money is often made on the downside faster when the markets free fall under fear. As the saying goes, “Markets take the stairs up and the elevator down…”
Bear markets can be profitable with many strategies.
1) Sell – The outright shorting of a market is the most direct way to profit from moves south. Obstacles of borrowing shares and paying interest make it more cumbersome than a long buy order.
2) Buy Puts – Puts provide buyers the right to be short from the strike price for a limited duration until expiration. Risk is completely limited to the premium paid with payoff dependent on the option strike. A purchased option is usually sold to exit the position. An endless array of option possibilities await when buying puts.
3) Buy Put Spreads – The put spread buy provides downside exposure while limiting both profit and loss to precise thresholds. Typically a put is purchased with another lower put sold to help finance the transaction cost. The net debit is the maximum risk if the position expires worthless. Profit is capped and limited to the difference in the strike prices minus the total premium paid.
4) Sell Call Spreads – Selling calls is never ever recommended because of the unlimited risk that can put you out of business. On the other hand, creating a bear call spread that caps exposure is a strategy to employ in downward markets. In fact, selling call spreads can be profitable and benefits from sideways action.
5) Buy Straddles or Strangles – The non-directional purchase of calls and puts simultaneously benefits for a large move in one direction or another. The total premium paid must be exceeded by the market breakout or breakdown. The most likely scenario for profit is an increase in option volatility inflating the straddle or strangle value when fear of falling price occurs.
6) Buy Bonds – In times of uncertainty money moves into the safety and security of U.S. Treasuries. The money flow and flight to quality often occurs when stock market volatility increases on sell off slumps.
7) Buy Gold – In the minds of many, gold doesn’t seem to get old as opposed to “paper” money. Physical commodities have real intrinsic value that fluctuates based on supply and demand, not central bank intervention.
8) Buy Bear Butterfly – Bear Butterflies are multi-legged strategies that are a combination of option put spreads. The risk is the premium paid with max profit if at the center strike at expiration. That payoff is the strike difference minus the butterfly cost.
9) Sell Bull Butterfly – Bull Butterflies, on the other hand, are multi-legged strategies that are a combination of option call spreads. Selling the Bull Butterfly limits profit to the premium received with the max risk if at the center strike at expiration. That payout is the strike difference minus the butterfly premium taken in.
10) CASH – Money in the virtual mattress is safe from market forces BULLISH OR BEARISH. Sometimes it pays to play it safe…
