Option Trades for a Bearish Outlook

Several weeks ago, we looked at option strategies for a bullish forecast for the market, underlying or both. Today we will explore a couple of option strategies for a bearish outlook. As we did previously, let’s consider a few examples of a bearish outlook either for the market or an individual underlying.

Bearish

The three most bearish opportunities in regard to technical analysis are a stock or the market breaking through support, a stock in a downtrend and a bearish reversal at resistance. A bearish move through a support level may be the biggest potential move of them all, just like a break through resistance for a bullish move. A stock setting lower pivot highs and lower pivot lows (downtrend) can also be considered a bearish outlook. A bearish reversal at a resistance level is a potential bearish opportunity as well. Let’s take an abbreviated look at a few potential option strategies to consider for your option trading plan.

Long Puts

Long puts and calls, as I mentioned previously, are often forgotten by option traders after they learn about spreads. But they still have the best risk/reward ratio of any option strategy with the long put being able to profit down to zero for the underlying. If your outlook for the stock is an expected big move or the stock is currently trading below a critical support level and has more room to drop, what better way to potentially capture a big profit than a long put?

Bear Put Spread

A bear put spread is considered a bearish strategy because the stock generally needs to move lower to profit. A bear put might be used instead of a long put when a defined move is expected or the options are expensive because of the underlying stock being expensive.

Put Calendars and Butterflies

For moderate or even really bearish expected moves, bearish directional put calendars and put butterflies are potential options too. Directional calendars and butterflies often give an option trader very nice risk/reward opportunities. The short put option or options are sold at the strike price the stock is expected to fall to at the short expiration.

Wrapping It Up

We have now covered both bullish and bearish opportunities. In the coming weeks, we’ll discuss neutral opportunities, and there are many of them to explore.

John Kmiecik
Senior Options Instructor
Market Taker Mentoring, Inc.   

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