Bear Market Equity Option Methods

The use of stock options in a downward moving market is an optimal time for them.  In general, when stocks are going downward they do so at a very quick pace   This is exactly the  optimal time to make use of the inherent properties that stock options have.  The main disadvantage of stock options is the time value that you must pay.  When stock prices are changing quickly, that makes time much less of a issue.  I have outlined several methods below to take advantage of this stock market condition.

Purchase Puts

This is the simplest strategy to use.  A stock put is simply the right to sell a certain stock at a particular price (called the strike price) before a certain date (the expiration date).  It makes common sense to just simply purchase a put.  Particularly if you already have the stock.

Sell a Call Option

This is often referred to as a naked call.  It is simply selling a call on a particular equity. When the stock goes downward the value of the call will go to nothing, therefore you keep the benefit! This can be a little harder employ as there are some regulations that one must adhere to.  The easier method is detailed in the next step.

Sell a Covered Call

In this case the capitalist is simply selling a call on an equity which he or she already owns.  There are much less hoops to jump through as far as margin requirements and the like when you own the underlying stock.  You may due this if you don't want to get rid of you equity for a loss, but still make some money before it starts to rebound later.

Buy Index Puts

This is a way to catch the stock market movement as a whole and in a sense diversify your portfolio.  The most commonplace index options are the S&P 500 options.  They are very liquid and have a high volume of trades every day.  That my not be the case with individual equities which can have low option volumes and high bid to ask spreads.

Employ a Bear Put Spread

This is a more advanced option strategy, but it has the benefit of reducing your risk.  A bear put spread  is when an individual buys a put at a specific strike price (say 55) and sells a corresponding put at a lower strike price (say 45).  Both options should be for the same month.  Otherwise you are placing what is called a bearish calender spread.  one would use this strategy if you believe the stock in this case will fall below 55 but remain above 45.  This is for use in more somewhat downward trending markets.

Conclusion

These are just several of the many great ways to make money using stock options in a down market.  Option trading is of course risky and is not for all.  However, if used properly can enhance the performance of your equity portfolio greatly.