Options Strategies for Bear Markets

In life, three things are certain: death, taxes, and bear markets. The current bear market might be your first and is an inconvenient reminder that risk is present when trading, particularly when trading options.

This episode discusses the best ways to survive a downturn to ensure this bear market isn't your last.

Preemptive safety

You never know when markets will fall, and a preventive approach with the appropriate precautions is the best way to secure your future. You can’t put on your seatbelt after a car crash!

Having up to 50% of your options trading account in cash is always a good idea. This cash reserve gives you a cushion to fall back on and ensures you’ll never lose your entire portfolio, no matter what’s happening in the market.

Trading small position sizes is another proactive way to withstand volatility. Remember, the goal of trading is to stay in the game long enough to let the game of numbers work in your favor. Balancing position size with probability of success is a powerful combination for any trader.

Situational awareness

If you’re aware of what is going on, you have a much better chance of adapting. Stay abreast of new developments, upcoming events, and market-moving announcements.

Have a solid awareness of market statistics and economic data. If you have historical, quantitative data for what happens after big market moves, you gain confidence and comfort during times of turbulence.

Adaptable options strategies

As the markets and environments shift, staying adaptable and ready for change is critical.

You can reduce risk by hedging long equity positions with protective puts.

Don’t forget that doing nothing is a strategy during high volatility. You do not always have to be active in the market; cash is a position, too. Again, knowing when to trade and when not to trade should be a part of your core strategy and not an emotional reaction to the environment or portfolio losses.

Watch these 12 guided video lessons to learn more bearish options strategies, and be sure to check out our in-depth options strategy guides.

Adjustments for your trading

Make a plan, stick with it, and prioritize a systematic market approach. Create trading plans in times of calmness so they can be executed without emotion when markets become volatile. You want to trade with as little emotion as possible and follow your rules and processes.

For example, maybe you reduce position sizing to compensate for volatility increases in the market. Let the market come to you and wait for better entry opportunities rather than trading in a panic of FOMO.

Frequent, high-probability trades that ladder into the market’s ever-changing price are part of a systematic approach to markets. Consistent and persistent!

Does market direction impact your strategy? If so, identify ways to hedge your portfolio.

Focus on what you can control

There are many factors impacting the market that are out of your control. Focus on what is in your control and make decisions based on those factors.

By diverting your attention from distractions and the destructive potential of volatility and position swings, you can significantly increase your ability to survive (and thrive!) in all conditions, even a bear market.