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Use A Bear Put Spread To Trade Safely In Down-Trending Markets

By Lou Manning


Wit the market having been in a sustained bull run for many years, the recent depression caught many traders unprepared. With the markets possibly set to become more volatile, learning to trade the downtrends is an essential skill. Tools such as a bear put spread are useful for profiting safely from such market conditions, and every effort should be learnt to understand how they work.

A number of investor steer clear of falling markets, although they offer huge profits to those who know how to handle them. While bull markets generally rise more slowly and last longer, down market do not last as long and falls are sharp, driven by panic. This pattern means that, once you know how to trade these markets, they are highly profitable

Many traders prefer a rising market. This might be due to their greater familiarity or feelings of guilt at making profits when so many may be losing their livelihoods. This means that the expert trader can garner huge profits from being capable of doing well no matter whether the trend is rising, sideways, or falling.

For serious traders, options present many great trading opportunities. A popular misconception is that options are too risky, and should be avoided. While this is true for average traders, those in the know are aware that it is possible to limit your risk and decide what level of risk you are prepared to take. As volumes on these markets are high and there are many trading opportunities, a sophisticated trader finds this market exceptionally attractive.

One way of limiting the risk on an option is to use spread trading. This involves two trades which act to hedge against the possibility of large losses, while still permitting a reasonable profit to be made. While profits are slightly lower, risks are greatly reduced, making the exercise very worthwhile. Using such techniques helps expert trader achieve steady gains.

Some traders rely on pure gambles, with large risks and large gains. Professional traders are aware that this will eventually result in losing everything, as a series of losses will quickly wipe a gambler out. It is also easy to waste money which comes from a successful gamble, so traders with this mindset do not usually last very long.

More experienced traders focus on controlling the risks, and are not lured by the hope of getting rich with one or two trades. They know that controlling greed is essential to long term trading survival. Learning to control your emotions is an important step, and avoiding the temptation of excessive gains helps to keep a level head.

Controlling the risk is probably the most important factor for those who trade for a living. The options markets offer the best means of taking control and setting the amount of risk you are prepared to accept. You cannot always be right, but all you have to do is gain more when you are right than you lose when you are wrong. To this end, you need to understand all the tools, including the place a bear put spread plays in an investment strategy.




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