Options Trading on a Bear Market

Welcome to the first-ever post of Sharemarket Secrets!

Admittedly, times are tough at the moment when it comes to the stock market (or share market, as it is called here in Australia). However, you can still make money in the market if you know the right strategy to use and trade the market. I'd like to share with you one strategy that I've been doing recently which have generated me a 30% return in 10 days. I didn't have a lot of money to invest, but this strategy is not high-risk (i.e., as with other investment strategies, there is a risk, but it is limited and capped, and it can also be reduced if it's starting to go against your way).

I use Options to trade the markets and generate this kind of return. Now, OPTIONS?? Well, most people in the know would have their eyes wide open and look at you with absolute horror and turn away. BUT, it's not what you think it is. A lot of people use Options to make money in the market, however, they do not know how to apply them properly. They get into these options strategies without any protection, hence, they get into a lot of trouble in the marketplace!

For those of you who are not familiar with Options, it is an instrument traded in the marketplace which enables a buyer of the option the right to buy or sell a stock or share at a specified price (called strike price) and at a specific date (called expiry date). If you want to learn more about Options, you can look into getting this e-book offered by Planet Wealth, which I'm currently using: http://tinyurl.com/pwlifestyle


For those who know Options, there is a strategy called Bear Call Spread. It's a strategy wherein you sell or write a Call Option at a strike price where you foresee the stock or share would not reach at a certain point in time, and then to protect you from the possibility of the Call option being exercised, you then buy or take Call Options at a slightly higher strike price (preferrably the next higher strike price) from the level you sold the call Option. The difference between the premium you receive from the Sell Call Option and the amount that you paid for the Buy Call option is called a Credit. The Credit is what you make at the end of the trade if it all goes well. For example:

A company XYZ is currently trading $2.00, but with the current trend in the market, it is foreseen to further drop another 20%. Also, you notice that technically, the stock or share has been hitting a resistance level of $2.30.

You can then sell a Call Option for $2.50, and receive a premium of say 70cents. You then buy a Call Option to protect yourself in case the price doesn't go down to below $2.50 before expiry date. You buy, say, a Call Option at $2.75 for 20 cents.

So, 70 cents - 20 cents = 50 cents, which is the credit or the amount you receive from the trade. If you did 5 contracts of this (in Australia, a contract is 1,000 units), that would be 5,000 x 50 cents, giving you a profit of $2,500!

The maximum risk on the other hand (if this does not go to you way) is $2.75 - $2.50 = 25 cents x 5,000 (for the 5 contracts) = $1,250.

If you do this once a month, it's like getting 30-50% return on your money each month! And this is each month, not per annum! Better than having it sitting in the bank with only 5% per annum return (if you're lucky after tax!) .

You should check out the Planet Wealth e-books, as they are a great tool for learning various Options strategies in the marketplace. It's all a matter of applying the correct strategy at the right time and situation of the market and stock.

One Sharemarket Secret unveiled!