How To Trade In A Bear Market: Investing During A Crash
how to invest in a bear market

How To Trade In A Bear Market: Investing During A Crash

Get ready to discover the best strategies on how to invest in a bear market in 2023 / 2024.

Are you an options trader who is afraid to trade in a bear market?

Do you want to learn bear market investing strategies and earn money in both bull and bear markets?

Do you want to know the Top 7 recession-proof stocks you can invest in today?

This blog post is full of information on how to invest in a bear market including tips on what you should do (and not do) to trade profitably in 2023 & 2024 with options trading.

How to Invest in a Bear Market: Strategies

  • - Focus on your watch list every day and you'll quickly become familiar with trading ranges
  • - You can sell calls during a bear market
  • -  You have to practice and build positive habits & deserve success
  • - Sell verticals / spreads to protect yourself against large spikes in volatility
  • - Most importantly, the time to prepare for a bear market is DURING A BULL MARKET. Buying options during a bull market will reduce portfolio volatility during a bear market.

Step-by-Step Guide: How to Invest in a Bear Market

In the video (below), I explain these steps further and I also give concrete examples.

This is your ultimate guide for options trading during a bear market or market crash.

I will teach you step-by-step how to trade and make money even when we're in a bear market / recession.

Before anything else, you need to believe that selling option premium gives you the best possibility of profiting during a recession (although I also believe that it's worthwhile to pick up inexpensive shares during a bear market as well).

Like I always say, I don't believe that day traders make money in real life.

According to this day trading study, only 1,000 in 360,000 day traders are consistently profitable; with the average day trader losing ~15% a year.

Only 0.28% of day traders in the study are consistently profitable; and the top 500 (out of 360,000) best performing traders earned an average of only ~5% over holding an SPY index.

Another recent study, from Brazil, concluded that 99.8% of day traders lose money and the 0.2% that made money earn less than minimum wage.

To summarize: You can earn better returns than the best day traders by simply holding the SPY index and selling covered calls.

Overall, the best way for retail traders to make money in the stock market is by selling option premium.

By doing this, you can earn about 35% a year.

Here are the steps you should take to maximize your profits:

Step 1: Create a Watch List with "Recession-Proof" Stocks

The first thing you need is a watch list of stocks. I've picked out a few below, which I believe are relatively recession-proof stocks.

You will also notice that there are many different sectors represented.

Investing during a bear market requires uncorrelated stocks that are relatively stable.

We have six sectors in all, that is a good diversification.

  • Lockheed Martin (LMT) [Defense]
  • RTX Corp. (RTX) [Defense]
  • Amazon (AMZN) [Technology / Consumer Goods]
  • McDonalds (MCD) [Cheap Food]
  • JP Morgan (JPM) [Banking]
  • Facebook (META) [Technology / Advertising]
  • TLT [Bond Fund]
  • GLD [Gold]

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Step 2: Focus Only on Your Watch List when Investing During a Bear Market

The next step on how to invest in a bear market is very simple - ignore other stocks and focus only on your watch list.

For example:

If Tesla falls $50 and you feel a desire to sell a put, don't give in to this temptation. 

Just ignore it.

Focus only on the stocks in your watch list.

You should be so comfortable with the securities on your watch list, that you can rattle off their prices and range easily.

If you focus on your watch list every single day, you will get familiar with each stock's trading ranges.

Don't distract yourself with other competing information - just ignore everything else.

"If you focus on your watch list every single day, you will get familiar with each stock's trading range."

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Step 3: Be Patient & Disciplined When Investing in a Bear Market

During a bear market, the selloffs tend to be extremely violent.

As a result, we tend to trade later in the day while also reducing the number of trades that we make.

Again...trade LATER in the day and be extra selective about entering new trades.

When Tastytrade tells you to "trade small, trade often", they're leading you down a path of stress and trading losses. Trading often is a recipe for disaster.

Successful trading does not mean sitting behind 10 computer monitors and constantly monitoring the market.

Consistently profitable traders are disciplined and choose their opening trades very carefully.

During a bear market, successful traders will wait for an underlying to ascend to the top of its trading range, and then they will sell calls to fade the move.

They will only sell puts if the market is extremely oversold.

And... if they sell puts, they will sell wide credit spreads.

I apply this options trading strategy to all of the securities on my watch list.

Remember, during a recession or bear market, prices are very volatile and you must be patient when entering positions (especially on the put side).

If you make ~1 opening trade a week, that should be sufficient. And... it's best to wait for the market to stabilize. You don't want to open trades (especially naked puts) during violent bear or bull moves.

One exception to this is our 0 and 1 DTE option trading strategy (which we trade in our large account trade alerts, available at live option trade signals) - this strategy utilizes strangles.

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Why I Don't Sell Strangles as an Options Trading Strategy (in SMALL accounts)

I am not a big fan of selling strangles with long-dated expirations, especially in small accounts.

While strangles are capital efficient, it's important to remember that when trading strangles

When you sell a put, it is NOT a good time to sell a call.

For example:

If Lockheed Martin fell from $450 to a current price $425, and you sell a $380 naked put, then you may be tempted to sell a call option and turn this trade into a strangle.

You might be tempted to sell a $460 naked call option...but this trade is very risky.

Remember that Lockheed Martin already is trading at a depressed price so you will not collect much premium for selling a $460 naked call even if it has high Implied Volatility.

This is why I don't recommend selling strangles - because anytime you sell a put, it's inherently a bad time to sell a call.

It's better to be patient and sell a put option or call option opportunistically, instead of forcing trades.

Again, do not force trades. Always be disciplined and patient.

Take the BEST options trading education course and become a profitable trader

Selling Verticals and Spreads during a Bear Market

In general, I believe it's best to sell spreads when the VIX is below 20 to protect against large volatility expansions.

In other words, the best time to prepare for a bear market is during a BULL market.

In early 2023, I sold a lot of vertical credit spreads because I wanted to protect myself against the large standard deviation moves in the stock market during that time period.

I sold vertical credit spreads to protect myself against large increases in volatility.

As an option trader, we get hurt when a stock violently moves ~2 - 3 standard deviations.

Currently, as of late October 2023, the stock market is down ~10% from its high and VIX is trading close to 22 (whereas earlier this year it was trading around 13).

In a volatile market, or when trading / investing in a bear market guide, I recommend that you protect yourself with some portfolio insurance. 

As a result, you may want to sell verticals as opposed to naked options during a bear market to protect yourself against large increases in volatility.

You can even BUY OPTIONS during periods of low volatility to protect yourself against large portfolio drawdowns.

Sell verticals to protect yourself against large spikes in volatility.

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Key Points: How to Trade During a Recession Summary

  • Step 1: Create your recession-proof stocks watch list
  • Step 2: BUY Options during periods of low volatility (bull markets)
  • Step 3: Focus only on your watch list; Do NOT get distracted
  • Step 4: Be patient & disciplined. Wait for the stock price to move outside its recent range
  • Step 5: Close out your positions early
  • Bonus Tip: Always have ~40% of your account as available buying power
  • Bonus Tip: Build and practice good habits (be patient when entering new trades)
  • Sign up for Trade Alerts – Receive real-time trade alerts so that you maximize your profits and minimize your mistakes; we have a Trial Offer of $19 for 7 days.

Step 4: Close Out Your Trades Early

This step is extremely important if you want to make money and learn how to invest in a bear market.

You need to close out your trades & positions early.

Closing out your trades early is difficult for many people because they feel like they're leaving money on the table.

Even so, it's important to create the habit of closing out your positions early because it removes risk and allows you to redeploy capital to new trades. 

Closing out trades early is active investing. You are able to close out the trade at your terms while reducing the risk of an outlier move.

Naked options should be bought back at a 50% or 60% profit relative to the premium received.

Spreads should be bought back at 50%.

It's also important to get into the habit of evaluating every position that you have and asking yourself:

"Would I make this trade right now?"

If the answer is "no", close out the position or manage / roll it.

I cover this topic extensively in my Best Options Trading course. If you want to learn everything that you need to trade options profitably, you can enroll and become a student.

"In a stagnant market, you should sell both puts and calls. In a bear market, focus on selling calls." - David Jaffee, BestStockStrategy.com

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Bonus Tip 1: Build Good Habits

It definitely hurts to close out a position by making an unnecessary adjustment.

I remember a situation where I closed out a $430 strike call for BlackRock when the stock was trading around $422.

I paid $170 dollars to close out the position, only to watch BlackRock fall to $410.

I thought, "I just threw away $170 dollars when I shouldn't have touched that position at all."

But, the reality is that I made a good decision because I was building & practicing good habits.

When deciding whether to close out BlackRock, I had no idea what might happen the next day and I made the right decision to reduce risk based upon the available information I had at that moment.

We cannot predict future price movements, and it's possible that BlackRock could have increased and challenged my $430 call.

I did not want to deal with that stress and it was better to reduce risk and close out the trade.

Bonus Tip 2: Keep ~40% of your Account as Available Buying Power

Make sure to trade small and always leave a minimum of ~40% of your account as available buying power (targeting 45% is even better).

For example:

If you have a $50,000 account, you should always have at least $20,000 available to trade.

You can also target 45%, which would mean you'd have $22,500 available to trade.

When trading verticals, do not be tempted to increase your size and trade too many contracts just because credit spreads are more capital efficient and do not reduce buying power nearly as much as naked options.

Remember that when trading vertical credit spreads, it's more difficult to roll and manage those positions.

I've seen many people trade 30 spreads when they would only be able to trade 2 naked options.

If the trade goes against them, they are forced to close out the position at a large loss.

Be extremely careful with your size and the number of contracts that you sell so that you establish good habits.

Conclusion: How to Invest During a Bear Market & How to Trade in a Recession

Even if I instilled you with all of my knowledge, you'd still need experience.

You have to practice and build positive habits.

It's important to not be greedy and not trade too many contracts.

Also, while you can read all the articles you want on SeekingAlpha.com and other websites. You will still need first-hand experience and the commitment to constantly improve.

I would not recommend trying to do everything yourself. 

If you choose to do everything yourself, you'll be overwhelmed by information, make costly mistakes and waste a lot of precious time.

I work hard to ensure that my students in the Options Trading Education Course and the Live Trade Alerts build up excellent long-term habits.

If you want to be a profitable trade, find a mentor who can help you achieve your goals and stop trying to do everything yourself.

Want to read another post about online stock trading and options trading? Click this link.

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Frequently Asked Questions (FAQs)

How to Invest During a Bear Market?

1. Sell far OTM puts on stocks you'd like to own

2. Take ownership of those stocks during bear markets when the market is oversold

3. Buy options during periods of euphoria when the VIX is low (this will reduce your overall portfolio volatility.

4. Sell calls during bear markets

How to make money during a bear market?

Usually the best way to make money from a bear market is by preparing for a bear market during a bull market. Buying protective put options during a bull market will help reduce portfolio volatility. Then, you can take ownership of oversold stocks and participate in their upside once the stock market recovers.

Do bull markets make you money, bear markets make you rich?

They can, if you prepare for them. During a bull market, you can buy long-dated protective put options and then accumulate shares during a bear market, while also profiting from the long put options that you purchased during the bull  market.

Bear Market Stocks to Buy?

Buying large capitalization companies with strong brands that you believe are oversold would likely be best. For example, stocks like JPM, AMZN, MSFT, LMT are good companies to invest in during bear market pullbacks.

Indices and ETFS are also very good, for example, GLD, TLT and IWM.

How long do bear markets last?

Typically bear markets last anywhere from ~3 months to ~1.5 years. The average duration is usually about 6 months.

In March 2020, the Bear Market lasted about 1 month, followed by a very sharp reversal. Although in Q1 2020, the stock market fell about 36% in 33 days.

Is it good to buy in a bear market?

Yes, it can be a great strategy to accumulate stocks during a bear market if you purchase large capitalization stocks with strong brands that are oversold. 

Bear market investing strategies

1) Focus only on the highest quality stocks

2) Sell OTM put options and then take assignment

3) Buy protective put options during a BULL market to protect against a future bear market

Option Trading Bear Market Strategies

1) Focus only on the highest quality stocks

2) Sell OTM put options and then take assignment

3) Buy protective put options during a BULL market to protect against a future bear market

4) Take assignment of stocks when you believe they're oversold (when VIX is very high)

Forbes Believes How to Invest in a Bear Market, Do You Agree? 

Forbes say:

How to Invest During a Bear Market:

1) Rebalance Your Portfolio: A diversified portfolio consists of multiple asset classes like stocks, bonds and cash.

2) Use Tax-Loss Harvesting: You can reduce your tax-bill while remaining invested via tax-loss harvesting.

3) Own Risk-Averse Assets

4) Buy the Dip and Stay the Course

Yes, I agree, however "buying the dip" is something that's easily said yet hard to accomplish. When will the "dip" stop? No one can predict future price movements.

In Japan, the market hasn't moved much in ~30 years.

What Forbes is missing in their article is that the best time to prepare for a bear market is during a bull market by buying cheap protective puts.

About the Author David Jaffee

I (David Jaffee) help people become consistently profitable traders while minimizing risk. I graduated from an Ivy League University and worked at some of Wall Street's most successful investment banks. Subscribe to my YouTube channel for valuable videos - BestStockStrategy YouTube Channel​. Finally, if you're looking to Land a Finance Job, then I've put together the best step-by-step course at LandaFinanceJob.com. My personal website is DavidJaffee.com.

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3 comments
How To Invest In A Bear Market: Trade & Make Money In 2020 says December 13, 2020

thanks

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How To Invest In A Bear Market: Trade & Make Money In 2020 - Rahove says December 6, 2020

Thanks

Reply
folorentorium says February 13, 2019

Really nice pattern and great articles, practically nothing else we require : D.

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