How To Make Money In A Bear Market (Stock Market Guide)

How to Make Money in a Bear Market (Stock Market Guide)

How to make money in a bear market?

How to trade in a bear market.

In 2022, a lot of people lost money because the market was down around 25%, with many individual stocks down 50%+.

In this article we're going to discuss the best way to trade in a bear market.

I think that a lot of you expect me to say that it's best to sell options especially because during periods of high volatility when VIX is high you're able to collect a significant amount of premium by selling out of the money options.

However, I think the best time to trade a bear market is by being "fearful when others are greedy" and buying options during a bull market - when options are cheap.

By doing this, you'll reduce portfolio volatility and profit during a bull market.

Also, traders can also wait for the market to pull back by about 30 percent and then just simply buy shares so that way you can participate in the upside (although buying shares is not very capital efficient).

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Profit in a Bear Market

Bear Market investing strategies?

How to invest in a bear market?

Back in March 2020 the stock market fell about 36 percent in 33 days, and also, in December 2018, February 2018 and August 2015, the market also experienced large drops and "V-shaped bottoms".

When trading, or investing, it's important to protect yourself against these large market drops and spikes in volatility.

During these sharp pullbacks, and subsequent recoveries, one of the best things to do is to buy shares, especially if you're using portfolio margin.

You can buy an underlying stock / ETF like QQQ, Tesla (although I'm not a fan long-term), Microsoft or Amazon and then just simply wait for that stock to appreciate in value.

You can then sell some covered calls against it, although to be honest I'm not really a fan of cover calls or the wheel strategy.

The primary reason that I'm not a fan of covered calls is that there are usually about 10 to 15 large up days every single year and by selling covered calls you're going to cap your upside if the underlying stock shoots through that short call strike.

People buy stocks to participate in the upside, but by selling covered calls, you're capping your upside.

If you want a more efficient way to participate in the upside of a stock, you can use a "synthetic long" options strategy by purchasing an ATM call option and then selling an ATM put option.

In general, I believe the best way to trade, and to make money during a bear market, is to initially sell out of the money puts and then take ownership of oversold stocks at the strike price.

While doing this, you'll already be hedged from the long-term put options that you purchased during the bull market.

Even if you're hedged, it's important to make sure that you don't trade too large because there's a large volatility component when trading options and you don't want many of your positions to become in the money at the same time, since this can cause a margin call where you may have to liquidate your positions at the most inopportune times.

Another bear market trading strategy, is to ensure that you don't have many correlated assets in your portfolio. You can diversify your portfolio by adding ETFs GLD and TLT.

Remember that the S&P usually generates a return of about 8% a year. If you're able to sell option premium on stocks that you want to own, and then take ownership of those stocks when they fall ~20%, then you should be able to easily beat the market returns.

So if you're looking for bear market investing strategies, how to invest in a bear market or how to make money in a bear market, then the steps are quite simple:

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How to Make Money in a Bear Market

I believe that the the best way to trade in a bear market is to: 

1) Trade and sell far out of the money put options (preferably credit spreads since they're defined riskon quality companies with strong brands

2) Have the desire to own these companies if they get assigned

3) Participate in the upside of the stock (or use a synthetic long option strategy, as discussed above)

4) Hedge your portfolio by trading credit spreads and buying options, for protection, during periods of complacency

There are many other things that you can do by looking at the volatility indices to mitigate your losses and time your entries, these are things that I discuss in the option trading education course.

One of the best ways that you can make money in a bear market, and how to not lose money during a bear market, is to make sure that you don't trade too much (don't over trade). 

If you trade too large then there's a decent likelihood of blowing up your account by being forced into a margin call.

I believe that it's better to be disciplined and patient and simply taking ownership of a quality stock at your designated strike price, then wait for the stock, or index, to recover so that you can participate in the upside. 

Remember when you sell option premium your maximum profit is going to be the initial credit that you received, so by actually taking ownership of the stock you're able to participate, on a dollar-for-dollar basis, if that stock goes up.

When a large capitalization stock, or index, falls ~30 percent in just a few months, and especially if it's a market leader, then history has shown us that there's a very high probability that a strong rebound will occur in the future.

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Conclusion (Make Money in Bear Market)

In my opinion, the best way to make money in during a bear market is to sell puts, take ownership of stocks and hedge your portfolio by purchasing options during periods of complacency (bull markets).

Following this strategy, along with not trading too large, should allow you to beat the market.

Frequently Asked Questions (FAQs)

What is a Bear Market?

A bear market is defined by a prolonged drop in investment prices — generally, when prices fall by 20% or more from their most recent high.

How to profit in a bear market?

The best way is to have hedges already in place during periods of time when the market is strong and complacent (a bull market).

Additionally, you can take ownership of high-quality stocks with strong brands after they've sold off by 20% - 30%.

Can I Make Money In a Bear Market?

Yes, by not trading too large and by being disciplined and rotating into quality companies.

Also, by having hedges in place that were put on during periods of prosperity when the stock market was trading near its 52-week highs.

How Can I Learn More About Bear Market Trading?

Visit beststockstrategy.com/memberships

Should I Trade Options During a Bear Market?

Yes, if done correctly, trading options will enhance your returns and allow you to beat the market.

Trading options, the correct way, will allow you to be profitable in all market trading environments.

When trading in a bear market, it'll help for you to study past market prices during bear markets so that you become familiar with extreme price action and volatility swings. For market data, you can use various companies that provide stock market api.

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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