How to Profit in A Bear Market - part 2

Last time we learned that by using covered calls you can limit loss, reduce your drawdown, and even profit on stocks you currently own during a bear market. Now, let's look at another option strategy that can be applied if no underlying security is currently owned. The simplest of strategies is simply to purchase a put.

A put gives you the right to sell a stock at a certain price prior to a set expiration date. For those unfamiliar with options, this can be confusing -- after all, why on earth would anybody sell you the right to sell them a stock at a certain price? If we step back and analyze the situation, however, isn't this exactly how your car insurance works? You pay a premium to your insurance company to have the right to sell your car back to them at a certain price. If you destroy your car and it is worthless on the open market, your insurance company will write you a check for the original value of your car.

Brining this concept back to the market, if you had your entire retirement savings in the stock market I bet you would be interested in learning that you can buy "insurance" that would protect the value of your portfolio -- however, that's the topic of another blog. What is important to understand now is that those "insurance policies," or puts, have value and can be traded as options on the market. As the price of a stock drops, the value of your put raises inversely!