It may be Halloween season, but investors seem more scared of bears than they are of zombies, goblins and ghosts.
Fortunately, if you are new to options trading, you’ll soon find that you have nothing to fear and everything to gain in bear markets. Here are just a few simple trading “tricks” that could help you bag some profitable treats during times of market volatility.
Come over to the dark side…and harness the force of fear in the markets
This section-title might sound a bit over-dramatic, but I really like Star Wars: The Empire Strikes Back and we’re going with a Halloween theme, so bear with me as I try to explain. When there is fear and uncertainty in the markets, the bid/ask spread can widen. Like a ruthless trader version of Darth Vader, you can capitalize on this fear by setting trades slightly beyond the prices you normally would be willing to take. For example, if you are looking to buy Bear Put Spreads at $1.00, you could try to dictate the price by offering $0.90 – with the assumption that there might be someone out there in the investing galaxy willing to take the other side of the trade.
Learn the Term:
A Bear Put Spread involves two Put option strike prices:
• A trader would buy one At-The-Money Put or Out-Of-The Money Put (strike price is above the stock’s market price).
• And sell one Put further away from price than the Put that was purchased.
Don’t be a hero
Kids like to pretend they are superheroes around this time of year, but that doesn’t mean you should too as a trader. Going after big directional wins in a volatile market can often result in big losses. There’s nothing wrong with looking for smaller, opportunistic, and strategic wins. Instead of loading up on upside calls, consider picking up Bull Call Spreads.
Learn the Term:
A Bull Call Spread can limit risk, but it also limits potential returns – which investors may deem as an acceptable trade-off in times of market volatility. Here’s how it works:
• Identify a Call to purchase that is near the current price
• Sell a call option that is further Out Of The Money than the Call you just purchased
• Decide on an exit point at which you want to take profits
Have your premium treats, and eat them too
Selling covered call options on the stocks you own can help generate income during down markets. You’ll get a premium for selling call options against the stock you own. If the option expires out of the money, the option won’t be exercised. You’ll get to keep both your stock and the amount of the premium you collected when you sold the call option. And if the stock somehow beats the bear market and increases in value above the strike price, the option might be exercised. You can either buy it back and keep your stock, or let it be exercised and cover the call you sold with the stock you own.
Volatile markets don’t have to be scary, as long as you are well-armed with proven trading strategies.