One of my favorite writers on the internet is Steve Place. Steve brings some fresh perspective about trading options and around volatility. I have mentioned him before and continue to read his material, it makes me a better trader – PERIOD. That is the highest praise that I can give anyone – Steve deserves it!
So, yesterday he put out an article he wrote last year that gave us all some good tips about trading options in a bear market. Who knows if that is the case now, but he certainly hits on some ways to protect. Read this, and then read it again.
Options Trading in a Bear Market: 5 Tips to Keep Your Money Safe
- September 23rd, 2011
Increased market volatility doesn’t have to make you upset. If we are in a new cyclical bear market (and the odds are increasing each day) then you need to use a different framework when trading options.
Stock options give you the ability to make money in any market, but first you must understand what “kind” of market it is, so with the right kind of options training you can adapt to whatever gets thrown at you.
Bear markets behave much differently than neutral markets or bull markets. Aside from the volatility and swift downside action, many traders forget that the largest up days historically will come after a strong period of selling. There are some crucial concepts that you have to use if you are going to trade options in a bear market.
1. Embrace the Volatility
Gone are the days in which you could hold a large amount of overnight directional exposure. With voodoo coming out of Europe (and more out of China) the market suffers large overnight gaps as the result of any headlines that come out while you sleep. (continued)