Every trader knows that the 13-year bull market from March 2009 is now over. The tech heavy NASDAQ Composite is now down 26.0% in 2022. This index was the leader for most of last year before topping out in November 2021. When the leadership falls and becomes the new laggard; it is usually an indication of bigger problems ahead for the bull market. In fact, all of the major stock indexes are trading in negative territory this year adding to a strengthening bear market case.
In every bear market there will be big bounces and counter trend rallies. That is what makes the bear market so difficult to trade and profit from. Many traders and investors will simply move to cash and let the bear market run its course before jumping back into the market. This is when options trading can really become important to use as an investment and trading strategy. You see, when you buy an option you are just laying out a fraction of the capital that it would cost to actually trade a stock. You can take a shot on a bounce or selloff in an equity without risking a lot of money.
Now please understand, options come with high risk and should only be used by traders and investors who understand how to read the charts. The max loss of an option trade will be the premium paid for the option and that is what many traders and investors like, they know their max loss on every trade should it go against them. The percentage gains are also usually pretty high if the trade works out and that is the reward. Remember, as a trader we only want to take the best chart pattern setups when they appear on a chart by reading patterns and using other technical tools. Anything else is simply gambling and that is not a recipe for success even in bull markets. It is critical to learn the charts and then you can start to trade the upside and downside moves that most bear markets present. So if you want to trade the bear markets options trading is essential.