The Bear Is Back

Heather Cullen

Heather Cullen

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In The Money

The polar Bear Market Is Back

Back in a Bear Market.

There’s no doubt about it; last night’s market drop has put us right back into bear territory. SPY closed at $377.39 which is quite definitively under the Bear threshold, see the chart below.

Bear Market Trade ITMB

All four conditions for entering a bear trade have now been met, so if you wish to trade the bear let’s have a look at the options that meet the ITMB criteria.

Option Expiry Date

Six months from now is March 2023 so let’s check the options chain. Yes, there is an expiry on 17th March 2023, so we will look at these options and choose one that conforms to the ITMB rules.

Option Strike Price

There are 187 strikes, which one to choose? In Chapter 6. Buying the Bear it is recommended that you don’t have too much leverage and that you look at options with a strike around 35% higher than the current price. This would mean looking at strikes around 508, so let’s have a look at what is on offer. Here’s the part of the option chain that we need.

SPY Option Chain ITMB Heather Cullen

I always gravitate to nice round numbers as they make the math easier, so let’s look at the 500 strike and see if we can make it work. It is 32.5% higher than the current price so it is in our ballpark. Let’s check the other parameters:

 

  • It costs $123.59 (we are using the Ask price to be safe, although we would probably get it for less, say $122.60). This means that one contract will cost us $12,359.
  • It has $122.61 Intrinsic value (How? Strike (500) – Current SPY (377.39))
  • It has $0.98 time value (How? Cost of option ($123.59) – Intrinsic Value ($122.61)) which is less than 1%
  • We have an Effective Price of $376.41 (How? Strike (500) – Cost ($123.59)) which is 0.26% away from the current price. This is less than the 1% that we need.

All looks good so this would be an option that fits all the criteria.

Cautions & Warnings

Bear markets can move fast so if you do get into a bear trade you must monitor it every day, watching for the signal that the bulls are back. Its quite unlike a bull trade where it takes some time to get the out signal. With a bear trade you have to be ready to jump out as soon as you see the signal.

Don’t put your entire account on a bear trade. ITMB recommends a maximum of 50% on a bear trade, and probably less than that is advisable right now, given the skittishness and volatility of the market right now.

Should I Buy?

I am not recommending that you buy this option just showing how it meets the criteria. It is expensive, $12,359 for one contract which may be out of your budget. We could go for a cheaper option that meets the criteria apart from being 35% over the current price. For example, the 430 strike only costs $56.29 and is 0.98% away from the current price which would bring down your costs considerably. However, it has very high leverage which is obviously more risky than a DITM option. It is entirely up to you to decide what level of risk you are comfortable with.

How Much Profit Will I Make?

This is where spreadsheets are very useful. With the $500 strike, we can look at what the profit would be depending on where SPY ended up.

  • If SPY fell to $350 at expiry, then we would make 21% profit.
  • If SPY fell to $320 at expiry, then we would make 46% profit.
  • If SPY fell to $300 at expiry, then we would make 62% profit

If you have not used an Options Calculator then now is the time to do so. There are many free ones (here’s a link to one: Options Calculator ) and if you don’t know how to use it then there is a section in Compare Options Strategies called How To Use an Options Calculator.

Your Decision!

It is perfectly OK to sit out a bear market; don’t feel that you have to jump in. The bull will eventually return – we just don’t know when. If you do decide to trade the bear, remember: not all your money, monitor it daily, jump out as soon as you see the signal.

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