Posts Tagged ‘Three’
Most people lose money in a bear market. Do you remember the tech bubble and recession in 2000-2002? This article will discuss three option trading strategies that can make you big profits in a bear market or recession.
Option Strategy No. 1 – Buying Put Options
It is fairly easy to purchase put options. This option trading strategy can even be used in an IRA account as long as you have been authorized by your broker. You desire to select a stock, which you feel has a good chance of going down in price. Your risk will be limited to 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
Buying a put spread is a little more complicated than just buying a put option but gives you the benefit of reducing your cost but caps your profit. 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 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. Alternatively, you could buy a married put on a stock in a sector you believe is going to appreciate, thus minimizing your risk. In addition to buying options on stocks, you can also buy put options on exchange traded funds or index options. Exchange traded funds let you invest in global markets, commodities and even currencies. 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.