"Equity options can be a powerful investment vehicle for any market, but they can be particularly beneficial in a bear market like this. They can help protect portfolios and provide ways to potentially profit from downturns in the market," said Fisher. "Regardless of how bearish or bullish the market may be, options can help investors achieve a wide range of objectives, while keeping predetermined levels of risk. With options as an alternative, individual investors shouldn’t be satisfied just keeping their heads down in hopes that the market turns around."
Help Protect Portfolios
The rapid growth of options over the last decade demonstrates that savvy investors already know that one of the most popular uses of equity options is portfolio protection.
"Investors who are concerned that the market may continue to fall, but don’t want to sell certain holdings, can help protect those positions with options," said Fisher. "A basic approach is to buy options called 'puts,' which give investors the right to sell stock at a pre-set price within a specific time period. With put options, if the stock doesn't fall below the strike price, the investor should still own it. One can choose to look at puts as a kind of portfolio insurance, where you pay a premium and forgo some of the upside in return for protecting the downside."
Options in Bear Markets
"In bear markets, individual investors have historically headed for the sidelines, even though these can be great buying opportunities," added Fisher. "What options offer, for the cost, is the ability to stay in the market, but with less capital at risk. Because the price of the call option is a fraction of what it would cost to buy the stock outright, the remaining capital is free to be invested."
