When a bears market comes around people start to panic. They panic because the bullish stocks they bought when the markets were going up are now losing money when they are going down. They do not know that if you want to make money during a bears market you should trade for the downside.
When the markets go down many market professionals make a killer by implementing bearish strategies. In fact some investors make more money when the markets are bearish. This is because markets tend to go down faster then they tend to go up.
Here I have listed 5 bearish strategies that can be used to make money when the market is heading down. So get ready to ride the market crash all the way to the bottom with us.
1. Shorting stocks for profit. Your broker has many stocks that they are holding for the long term. They do not care what happens to them right now as long as they make a profit in the long haul. Let us say it is trading at $100 you can borrow their stock and sell it. This makes you an instant $130. Then if the stock drops to say $90 you can buy it back at $90 and give it back to your broker. In this example you made $40 per share.
2. Buying puts for leverage. When you buy a put for a stock what you are actually doing is buying the right to sell a stock at a given strike price. This way if the stock’s price drops our puts price goes up. If we bought a put with a strike price of $130 on the same stock for $6 we could have made money while the stock goes down as well. The difference between the puts strike price and the stock is $40, so your put would be worth at least $40. Buying puts is a highly leveraged way of trading and will eventually expire worthless if not sold by its expiration date.
3. Selling calls. A call is the opposite of a put. When you buy a call you buy the right to buy a stock at a certain price. So, if you sold a $135 call on that stock for $4 you automatically take home $3. Now as long as the stock stays below $135 by the time the call expire you make $4. This means the stock can do nothing, even go up a little and you still make money. Just be careful this is one of the riskiest things you can do. If this stock goes up to $1000 you will have to buy it at $1000 and sell it at $135, which hurt. Your max loss is infinite.
4. Doing a spread. This is similar to the sell a call strategy, but it limits our risk. Here we would sell the $135 call for $4 and buy the $140 call for $3. Now you only made $1. However our risk is a lot lower. We still make money if the stock stays below $135 just like you would if you sold a call. Its advantage is if the stock goes up to $1000 you can buy the stock at $140 and sell it at $135 Your max loss is only $5(difference in spreads) - $1(you made) or $4.
5. Buying a leap. This a compromise between high leveraged puts and low leveraged shorting. Here you buy a put. Unlike our previous example however were it will expire in a few months a leap will expire in 1 or 2 year. For this extra time you will have to pay more than a regular put. If $130 put cost $6 a $100 leap might cost $18.