Tuesday, March 17, 2015

Trading Strategy in Bear Market

The term bear market refers to a market condition in which the prices of securities are falling. This type of market is generally associated with investor pessimism. Most investors agree that a bear market occurs when prices decline at least 20 percent over a two month period. Below are some trading strategy tips to remember during a bear market so that your portfolio remains healthy.

Buy Puts
Buying puts is a typical bear market trading strategy. It gives investors a limited downside and, if done correctly, it also gives a high chance of reward. The maximum loss for investors using this trading strategy is the amount paid for the contracts. For investors to earn rewards, they need to correctly anticipate the date stock prices begin falling, as it will need to fall prior to the expiration date.
Sell Naked Calls
Selling naked calls is a trading strategy that has high risks and limited rewards so take caution when considering this option. Investors that sell naked calls collect a premium for the sale of the contracts with the thought that the stock price will remain under the strike price past expiration. This will effectively make the stock worthless and the premium is kept by the original investor. If the price exceeds the strike price, investor losses can add up quickly.
Bear Call Spreads
This trading strategy incorporates low risk but limited reward and is created by selling at-the-money calls while also buying the same number of out-of-the-money calls. Investors employing a bear call spread trading strategy want the stock to fall below the strike price of the calls sold prior to expiration in order for the investor to keep the premium.
Bear Put Spreads
A bear put spread trading strategy is created by buying at-the-money puts and selling out-of-the-money puts. The potential loss for investors applying this trading strategy is limited to the cost of initiating the trade.
Put Back Spreads
When investors are expecting a large drop in an already hostile market, they utilize a put back spread trading strategy. It involves selling a put at strike price while buying other puts at lower strike prices. This method, though it has very little risk involved, also has limited rewards for those who are successful.
Synthetic Shorts
Finally, a synthetic short is a trading strategy that mirrors short selling a stock. It is created by buying at-the-money puts and simultaneously selling an equal amount of at-the-money calls with the same expiration date.
In times when most investors have lost confidence in the market and it is heading towards being labeled a bear market, you are still able to make returns on your stocks. Follow the above trading strategies for successful trading.
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