Profiting in Bear Markets or downturns using Bear Put Spreads

Before I take a deeper dive into this strategy, I should mention a caveat. “Bulls take the stairs and Bears jump out of the window

What this means is that when markets are trending up, they chug along slowly in an orderly fashion. In upward trending markets, this provides amazing opportunities to take trades on pullbacks as stocks almost always revert back to the mean and resume their trend. 

However, when markets turn bearish, it feels like the bottom fell out from underneath you. Things go south so quick that you will be left paralyzed trying to decide whether you should take a bearish trade or not. After all, a bear trend does start with a pullback and if you were taking trades in a previously bull market on every pullback, you could easily end up taking bullish trades on the first or even the next pullback which will cause pain. Just accept the fact that by the time you realize that you are in a Bear Market, you would have endured a lot of losses. I will add some tips in the end to reduce these losses.

Since I trade Options, this article will be focused on Options Trading only. My primary trading vehicle as described in my book is vertical spreads (specifically debit spreads). 

There are many other ways of achieving the same outcome, eg. Selling Call Credit Spreads, or even buying straight out Puts, but what will lead you to success is not the structure of the trade but knowing when to put it on.

Constructing a Bear Put Spread

This is a profitable trade that I took in my own portfolio a few months ago.


TRADE STRUCTURE: DE $435 – $430 Put Spread

COST: $250 | Potential Profit: $250 | Days to Expiration: 14 days

Constructing the Trade: The notation of a Bear Put spread is – SYMBOL $LONG PUT – $SHORT PUT. Your goal is to double your money as long as the stock expires below your short put. In this example, you are buying a DE $435 PUT and selling a DE $430 PUT in a single trade (which is what makes it a vertical spread). As long as DE’s price is below $430 on expiration day, this trade will double your money. You could always choose a lower profit target too. eg. I closed this trade for 60% profit. 

Rationale: DE broke out of its consolidation pattern and shot up like a bullet. I was monitoring it for signs of exhaustion to take a bearish trade. The signs showed up finally on 3/28 when we saw the first red candle. If you look at the DMI indicator, DI+ is curving down indicating a loss in upward momentum. RSI which was in oversold zone is also beginning to point down. These are enough signs for me to take a trade. 

Notes: In the stock market, there is only guarantee, and that is – “There are no guarantees”. DE could very well have continued on its upward trajectory even though the technicals were pointing in the right direction. But nobody said trading was easy! You take trades when you see indications that satisfy your rules. The outcome is not in your control.

Outcome: This was a profitable trade which yielded 60% ROI in 14 short days. However, note a few important things. 

  • Bearish trades are taken for short durations. I take them for 14 days. If you have read my book you will notice that, bull call spreads on the other hand are taken for 30 days.
  • Once you put on the trade based on your rules, the outcome is not in your hand. You could follow the 50% loss rule to cut the trade if it starts going against you. This is especially important since you only have 14 days to be right.
  • DE went in my direction for 8 days but started turning back up. I was still able to close it for handsome profit though. 

Tips on reducing losses when markets turn against you :

  • Accept the losses – As mentioned earlier, if you were taking bullish trend on pullbacks in a previously uptrending market, you will suffer losses if markets continue to fall hard.
  • Keep an eye on that VIX – When VIX is high it represents uncertainty in the markets. At the time of writing this article a value > 25 will coincide with unstable and highly volatility markets. If you have 2 consecutive weeks of losses and VIX is still high, you could either stop trading or drop your trading volume drastically until VIX calms down.  The other option is that you could take bear put spreads on the days when markets spike up as long as VIX is still in that high/danger zone.