Discover more from The Stock Market Academy
How to Make Money in a Bear Market
Find stocks that are about to collapse, then bet against them.
In last week’s newsletter, I noted I was looking for 1/2 things to happen:
A candlestick reversal at Bollinger, which we never saw;
Otherwise expect continued selling.
Both eventualities remain on the table.
But with the market clearly in a sell off, one has to ask: how do you make money in a bear market?
Watch this video to find out. And read on to learn the two most popular ways to bet against a stock.
How to Bet Against Stocks: a More Detailed Explanation
You can bet against a stock by 1) shorting the stock or 2) buying a put option, which is the right to sell it at a higher price. If the price goes down, the value of the put option goes up.
Method 1: Short Stocks (Sell Now, Buy Later)
The way shorting works is that you sell at stock now at the current price, in hopes of buying it back in the future at a lower price. Shorting is risky because the potential loss is infinite. If it goes against you, you could owe a huge sum of money to your brokerage.
Method 2: Buy Put Options
But if you buy a “put” option, you can only lose what you invest. A put option gives you the right to “put” a stock to someone else, at a higher price.
You might think options are riskier than stocks, but if you use them right, they’re not.
After all, don’t forget — options were built for exactly that reason: to take risk OUT of the stock market moves. Your max downside is what you paid for the option.
How Put Options Work
Let’s say you buy a put option to bet that a stock goes down below $40. The option might cost you $0.80, which allows you to control 100 shares.
$0.80 x 100 = $80.
You would actually pay $80 for the option itself. If the stock craters, you could make 300-500% in days or minutes.
If it goes against you, you only lose $80. Versus the potential infinite loss shorting stocks.
Because of the limited downside, and extremely high reward/risk ratio, you only have to be right 25% of the time to succeed (if you manage your money right).
For those reasons, put options are my preferred method. So if you think a stock is going down, buy a put option.
But how do you find what stocks are going down? Look for a break in the trend line.
Conclusion: Take Advantage of Weakness
You always want to look for a breakdowns in a trendline or support levels to sell.
If the bounce doesn’t happen off support, and price closes below the trendline, expect more selling pressure, especially if there was high volume on the breakdown.
Here are some examples of potential short candidates on my watchlist:
Happy Trading 😊