Tales of a Technician: Are Bear Trades Worth It?
January 10, 2022
I received the following list of related questions regarding bear trades. I suspect you too may have wondered something similar before.
I have a question on bear puts and bear calls. Are they really worth doing? Here’s why. Does the bear market last long enough to make money? And overall, it’s seems the market has more bullish trends than bearish. How often do you really see a month long bear market? And even in a short term trend, the market would have to make a big enough dip to make a profit. Am I missing something? It just seems it would serve better to learn more bull strategies.
Let’s start with this.
Whether any particular strategy is worth doing ultimately comes down to whether you personally can make money with them. If someone finds a way to manage bearish trades successfully, such that they improve their overall trading performance, then it doesn’t really matter what I say, now does it?
This explains why I’m such an advocate for journaling your trades to identify what really works for you.
That said, I agree with virtually everything expressed in the question.
Bear Market Frequency, Length, and Duration
Let’s start with the related questions of whether bear markets last long enough and fall far enough to make money with bear trades.
The short answer is yes. They do last long enough and fall far enough to where someone could profit if they were on the right side of the trend.
Consider the past 42 years in the S&P 500, for instance. Though the market gained in 76% of the years, there were still some significant downturns along the way.
If you’re an active trader and the trend is down, then you ultimately have two choices. First, avoid bearish trades and sit on the sidelines until the uptrend returns. Second, place bearish trades and try to capitalize on the weakness however long it lasts. So far, I’ve taken the former route with my Team Phoenix trading lab. Rather than try to capitalize on market drops, I’ve instead played defense and waited for prices to find a bottom and turn higher. This has served me well and fits my personality better than flipping bearish every time the daily chart turns.
If we enter a prolonged bear market like 2000-2003 or 2008, then perhaps necessity will require being a little more adventurous on the short side. But we’re not there yet.
I think it’s important, too, to point out the time frame here. The strategies in question were bear calls and bear puts. These are short-term trades, and I don’t mind someone using them. But going long-term bearish is completely different. History has proven it’s a sure way to the poor house.
Pessimists sound smart. Optimists make money.
All of my long-term investments are bullish. I view the advance of the financial markets as permanent and the declines as temporary.
Am I Better Served Learning Bullish Strategies?
A thousand percent yes. Per the graphic above, the market has risen in 32 of the past 42 years. And those odds continue if you lengthen the lookback period even further. Is that a trend you want to fight? I wholeheartedly endorse the idea of mastering bullish strategies over bearish ones if you had to choose.
The other reality about bear markets or downtrends is that they are far harder to trade than uptrends. This is because they are more volatile and riddled with gaps. Bears have to sit through massive up days during downtrends and not get shaken out. It’s more difficult than sitting through small pullbacks during an uptrend when you’re bullish.
Now, all that said, I still endorse learning the basics of how bearish options spreads work because they are part of more advanced strategies like iron condors and butterflies. If you first learn a bear call spread, then iron condors are easier to understand, for example.
I’ll end my answer where I began. The best strategies to use are those you can make money with. It is harder to profit with bear trades than bulls, but it’s not impossible. Ultimately, you need to decide where you want to focus your efforts.
Read more Tales of a Technician [FREE Content]
Financial freedom is a journey
Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.
Legal Disclaimer
Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.
All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.
Thanks Tyler! I had a few ah hah while reading this. 🙂
2022 goal, among many others– learn some bear strategies, management tools. great article, great question