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Hey everyone, this is Kirk here again at Option Alpha and in this daily call, we’re going to answer the question – “What are the best option strategies for a bear market?” Now, at the time that we’re recording this, we are not in a bear market, but inevitably, imagine that at some time in the future, we will be in a bear market and markets do correct, they do go down and we’ll probably see some volatility. And so, the question is, “How do we trade this? How do we not only protect ourselves from this, but how do we profit from a bear market move or a decline in the stock market?” The first thing I will tell you is that you have to wait. This is something that we definitely learned in lots and lots of research of back-testing different bear market scenarios, back-testing market crashes, not only global market crashes, but different actual ETF and sector crashes, like the crash that happened in the dollar, the crash that happened in gold and silver, in the oil markets. All of these different markets have very much similar characteristics. Although no two crashes are exactly the same, what we did find is that the prevailing characteristic that you have to understand as an options trader is to wait and don’t try to anticipate the crash. That's where people get really lost in this business and end up blowing a lot of money, is waiting for the house to burn down. I use the house analogy a lot with coaching clients because what I end up telling people that they’re doing by trying to front-run a bear market and try to buy options or buy spreads, anticipating a move down, is like buying insurance on a house that’s not burning down yet. What I tell people do is wait for the fire to start. Wait for the house to actually start burning down and then start to buy insurance on that. Now, of course, you can’t do that in the real world in the housing market. If your house is burning down, you can’t call your insurance agent and say, “Hey, I want to buy insurance this house.” But the beauty of the options market is you can do that. You can wait until markets are starting to cyclically break down and we start to see industries and sectors really break down. Once that starts to occur… You’ll know because everyone will be talking about it and you’ll start to see declines and the market really starting to falter, have a difficulty rallying. Once that starts to happen, then you can start to execute a bearish options strategy. One important note… We actually covered this in the weekly podcast a while back when we talked about different option strategies that we back-tested for bearish market scenarios. You can go back to the weekly podcast and check that out on those one of the earlier shows we back-tested put option strategies. But one of the interesting metrics that we learned in that, just a little case study, is that most of the returns from any option buying strategy in a bear market scenario actually came at really like the depth of the market. You have to understand though, when you get into an options buying strategy, if you choose to do an options buying strategy and you're going through a bear market or a market decline, volatility is going through the roof, so you end up paying higher and higher premiums for more volatility. What that means is that ultimately, it only works best at the depths of the market. When the markets are really at the inflection point where they’re really going down hard, it seems like there’s no floor, that ended up being the best time to trade them. It’s really hard then to anticipate when that happens. We don’t know if today’s move of 3% lower or 5% lower is really the end or if there’s another one right behind it. When we back-tested different option strategies, you can obviously go one of two different directions. I’ll tell you both ways that you can go and you can ultimately make your own decision. I think at the top of a market, when we start to see new stories and data come out and we start to hear the rumors of a cyclical turn or a market turnover and the market no longer is making higher highs and higher lows, but is really starting to try to find its footing and starts to trade more or less sideways for a month or two, I think at that point, the best option strategy from what we've seen is obviously call credit spreads. You still want to be selling options, you still want to be collecting premium, but at that time, you're not taking a directional stance in the market because at that point, the market has not turned over yet and is really not even running lower in any significant manner. It’s just trading within a range and trying to find its footing. In the last 2008-2009 crash that the stock market went through in the US, we saw that the market actually went through this type of scenario for almost a year. I mean, really, there was about a year period of lots of volatility, but pretty much sideways action for the market before it had its final plunge lower. In that time period, it's better to trade call credit spreads where you’re selling spreads out of the market, even selling neutral iron butterflies, iron condors right around the market scenario where it’s at. When you get into the situation where the market is continuously making lower lows, it seems like all the news is terrible, there’s market panic, there’s mass hysteria all over the place, everything seems to be breaking down, at that point, if you do execute an options buying strategy, what you want to do is you want to buy spreads. You don’t want to go out and buy long options. That’s probably the worst thing you can do because at that point, what you’ll end up doing is you're paying for all of that fear by buying those contracts. You’re basically feeding the cycle anyway and you’re buying those option contracts with a lot of high implied volatility which means you’re in most cases, overpaying and your breakeven points are really, really low compared to where your strike price is. You might buy a 150 strike put option, but your breakeven price might be 120. The stock really has to move even below 150 to 120 before you make $1 on that contract. What you need to do is you need to focus on trading spreads. You need to be buying options say at the 70 or 60 Deltas and then selling options at the 20 or 30 Deltas and doing spreads. Yes, that means that you are going to forego massive profits if the market totally collapses and you’re 100% right, but at the sake of being a more diligent and systematic trader, it's much better for you to consistently trade spreads and do it all the way down if you want to at the depths of the market crash than to do long option contracts solely or individually. As always, if you guys want to learn more about the different scenarios that we back-tested, we have a whole different section that’s part of our profit matrix report that we released a little while ago that has all of these different scenarios, not only with the best strategies for market buying with more specifics on spreads and days to expiration and how far you out you buy these contracts, etcetera. You can check it out on our website in our research section. Again, it’s our profit matrix report and you can get to it by going to optionalpha.com/profit. Until next time, happy trading!