Options can be used to make the most of bullish market conditions just as they can be used to make the most of bearish market conditions. The beauty of options is that they allow you to work markets in both directions. Because options are non-linear, you can combine them with other options and also with futures to create elegant hybrid strategies to capitalize on market bearish opportunities. So, if you expect the market to fall, you don’t have to be concerned about falling prices. Rather, you can profit from the fall by utilizing the power of options. In fact, you can choose between being moderately bearish and being bearish with conviction. Options can be used not only alone, but also in conjunction with futures and options. Such combinations are referred to as hybrids. Let us try to understand the use of bearish option strategies, which means trading options in bear markets. Trading options in bear markets necessitates the use of a distinct set of strategies in order to make the most of the situation. Let’s take a look at four of these bear option trading strategies.
Trading bearish markets with a naked put option:
This is the most straightforward way to use options in a bearish market. A put option is the right but not the obligation to sell a stock or an index. That is, you will pay a premium to obtain the right without being obligated to do so. That premium is your option price, and it represents your maximum loss in the transaction.
Trading the bearish market with insurance using the protective call strategy:
A protective call is a bearish strategy that also has built-in insurance. The issue with purchasing naked put options is that you end up paying a large premium, which is often difficult to recover. That is why, in 95 percent of cases, option sellers in India make money while option buyers lose money. A protective call strategy, in which you sell futures and protect it by purchasing a higher call option, is another option. Keep in mind that when you sell futures, you must pay a higher margin as well as mark-to-market margins. However, this strategy can essentially results in bringing down your break even point.
Bear put spread strategy with a moderately bearish bias:
The covered put strategy has the disadvantage of leaving the upside risk open. A bear put strategy can be used to solve this problem. This is a moderately bearish strategy as well. In this case, you would buy a higher strike put and sell a lower strike put. As a result, your maximum loss is limited to the amount of your net premium.
Moderately bearish strategy via covered put strategy:
Consider the case of Corp X, where you do not expect its share price to fall below Rs.900, but rather to rise above Rs.930. In this case, you would sell Corp x Futures at Rs.960 and then the Corp x 930 put option at Rs.10. This effectively reduces your average cost of shorting corp x by Rs.10, resulting in a new effective purchase price of Rs.970. On the negative side, the maximum profit from this strategy is Rs.930. Whatever you gain on the futures is lost on the short put option below that level. However, it should be noted that this strategy has an open risk on the upside above Rs.970. That is a risk you should be aware of.
No matter what strategy you are planning to employ,trading in options India during a bearish run with Tradeplus can yield you great results.