Ask most traders how to profit in a bear market, and they’ll say “buy puts.”
I get it. Put options go up as prices go down. Prices, as we saw yesterday, are very much going down.
It sounds like a no-brainer… But trading options is never quite so simple.
Puts can deliver gains as stocks fall, no question about it. But they can also lose money as prices fall.
It all comes down to supply and demand.
In a bear market, demand for puts is at all-time highs. That makes them more expensive — but many traders are willing to pay the price.
They figure they’ll still make money on the trade, so long as the market continues to decline…
Until the trade “wins”, and their portfolio is still in the red. (Yes, it can happen. I’ll show you how in a second.)
All the while, the other side of the option chain sits overlooked — even as it continues to provide far better opportunities even in a bear market…
You Can Still Lose Money in a “Winning” Trade
Now, how can a winning trade still lose you money?
To answer that, we need to look at how options contracts are created in the first place…
The single most important factor market makers use when pricing options is implied volatility (IV). IV represents the expected volatility of a stock. It rises as prices fall, and it also rises if traders expect prices to fall. It also accounts for supply and demand.
Options don’t have a fixed amount of supply. Market makers can and will create as many contracts as traders want, and thanks to some complex formulas, they can do that without creating more risk.
While these formulas provide profits to market makers, we can’t take direct advantage of them. They require access to billions of dollars and the fastest possible data sources.
However, we can benefit by simply understanding them.
In the options market, demand is asymmetric. When it comes to indexes and ETFs, there’s always more demand for puts than calls, whether from bearish traders or investors hedging against losses.
The demand is even more lopsided now that we’re facing a looming recession (or worse, stagflation). As more and more traders rush to buy puts (on a sharp down day like yesterday, for example) the IV of the contract rises, and makes it more expensive.
If you’re one of these buyers, you’re paying a large premium on that put option. As the volatility of prices eventually returns to normal, the IV will drop. This will reduce the price of the option, and you’ll suffer a loss even if prices continue to fall.
Meanwhile, call options are underpriced and overlooked. Nobody’s scrambling to buy them on days like yesterday, so their IV remains low.
Instead of sinking your money into puts, you could start trading short-term calls on stocks. You just need to find the right opportunities — whether it’s a dead cat bounce, or a bull hiding among the bears.
This is important to remember. In bear markets, puts are overpriced, and calls are underpriced. Right there, you have a way to shift the odds in your favor.
Andrew Keene knows this. He’s just put the finishing touches on his most elite bear market strategy to date.
Over the last few months, a lucky few were able to test run this strategy. During that short time, they landed six triple-digit gains, and were UP while the broad market continued to crash.
“Up” is an understatement. Andrew didn’t barely notch a positive return. He made a 139% total return in the worst four months for stocks in years.
Tomorrow at market close, Andrew is going live to show you exactly how he does it. If you haven’t already, I urge you to click here and claim your free spot.
Clear your calendar for 4 p.m. ET tomorrow. You don’t want to miss this.
Regards,Amber Hestla Senior Analyst, True Options Masters