- Strategies for a Bear Market
- Bear Market Stock Trading Secrets
- 8 Tips for Trading a Bear Market
- 1. Trading Psychology
When this happens, you get to keep the entire premium, leaving you with a solid profit. When you get the premium, you also earn downside protection for your portfolio, which helps you break even when you sell a put. During a bear market, make the most of the opportunities where you can make profits from short-term put sales.
If they pay dividends, this strategy is even more advantageous. If you opt for this strategy, keep in mind that short puts may result in potentially large losses if the market continues to drop. While bearing call spreads offers low risk, you also get limited returns. The profit you make comes from the premium paid by simultaneously selling both out-of-the-money and in-the-money calls.
To keep the premium, the stock needs to fall below the strike price of the calls sold before expiration. Using this strategy involves buying an in-the-money put at the same time you sell an out-of-the-money put. When you bear put spreads, you limit your loss to what you paid to initiate the trade. When the stock closes below the out-of-the-money put before expiration, you can expect a decent return. Using contracts for difference when you sell short allows you to use leverage without actually owning the asset.
This lets you control more shares with a smaller amount of initial capital.
When you use contracts for difference, you increase your potential gains and losses. Product Details Price.
Strategies for a Bear Market
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Conversation Starters from ReadingGroupChoices. The other benefit is that you know the maximum that you can lose by going long these securities. A common misconception about bear markets is that long-only trading strategies all lose money and only short strategies perform well. During sustained down trends you get periods of falling share prices but you also get moments of upward movement as well. These are often known as relief rallies, short squeezes or they might be called a dead cat bounce. When the market rallies during a bear market the movement is often sharp and short in duration which turn out to be good conditions for a mean reversion type strategy.
Mean reversion strategies are essentially liquidity providers, they step in during times of market panic and get rewarded for taking on risk. So long as the stock is not in terminal decline, it can pay off to buy into heavily oversold names. These can bounce back on any positive news and when short sellers take profits. As an example, one mean reversion strategy on our program recorded a backtest return of Trend following strategies have been around since at least the days of Richard Dennis and the Turtle Traders. The strategy involves buying up trends and shorting down trends across a broad selection of different futures contracts.
In this way you can take bets on uncorrelated assets hoping that at least one or two will enter big trends. Typically, trend followers break up their portfolios into four or maybe five asset types.
Bear Market Stock Trading Secrets
Below is the mix used by one of the pioneers in quant trend following Winton Capital :. Trend following in futures gained a lot of popularity after the crash of because it significantly outperformed while most other hedge funds and investing strategies lost money. However, the strategy has not done as well in recent years as volatility has dropped and stocks have delivered strong gains. But when stocks drop, it could come to the fore once again.
Long-short strategies are another good option since they can perform not only in bear markets but also range-bound markets and even bull markets.
8 Tips for Trading a Bear Market
Good performance in a raging bull market is obviously difficult when all stocks are going up but it can be achieved if your stock selection is really on point. The key to a good long-short model during a bear market is to pick high quality stocks on the long side that people will gravitate to during a crisis and low quality stocks on the short side. High quality stocks may include big blue chips, utility stocks and dividend payers whereas low quality stocks are businesses of a speculative nature. Stocks that have a lot of debt without profitability or with sky-high price to earnings ratios can be highly dependent on market swings and investor sentiment so these stocks can get hit hard in a bear.
For example, climate change headwinds are weighing heavily on energy stocks right now. Quantitative ways to approach a long-short model include using technical indicators or factors.
These are all factors that investors have used in the past to separate out stocks. This paper from Blackrock discusses one strategy based on earnings quality. Factor investing is all about holding a large number of stocks so that you can capture the small edge that is present in that particular factor.
By holding an equal number of long and short positions you can maintain an overall neutral exposure to the market. An alternative to using factors is to look at historical correlations and implement a pairs trading strategy. This is where you track two similar symbols and buy one and short the other when the correlations move out of sync. This is often based on standard deviations away from the average correlation. Most VIX ETFs were not around the last time we had a significant market crisis and they are likely to play a much larger role for traders the next time round.
1. Trading Psychology
Volatility strategies typically come in three different flavours; long volatility, short volatility and term structure trades. The latter is all about identifying opportunities in the pricing of VIX futures and cash products contango and backwardation. Such movements are likely to get even more out of sync during a market downturn.
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Going short volatility works well when the VIX has spiked to a high level and you can see a calming influence on the cards for example, a central bank announcement. On the other hand, shorting volatility ETFs when the market is rampant is dangerous. Going long volatility works well when the VIX has been low for a long time and you can see a bearish catalyst ahead. However, the time decay can be so vicious that your timing needs to be spot on. There is an interesting paper on the SSRN website called Value Bubbles which looks at how value investing strategies perform over different market periods.
The authors found that value strategies are about three times more potent after a period of negative market return, implying that the best time to buy value stocks is during or towards the end of a bear market or correction.