For those who are familiar with the stock market, you are probably familiar with the terms bearish, bullish, and neutral. If you have heard those terms, this post on market direction will most likely be a refresher course for you.
This is also a great post for those looking to find a list of strategies for when your market assumption is bearish, bullish, or neutral.
Let's get started by looking at what bearish means in terms of the market direction.
When you hear someone say that the market is a bear market, that means that the market has been moving in a downwards trend for a given timeframe (a good rule of thumb is that if the timeframe is over 2 months, it is considered a trend - rather than a correction).
Want an easy way to remember that a bear market means a downward trend? Here is a good mnemonic device...
When a bear attacks, it swipes down
Easy enough, right?!
A Bearish Assumption
Bearish is not only a term to describe a particular market condition, it is also used to describe the bias an investor has when considering which type of strategy they put on. Before placing any type of trade (stock, option, future, etc.), an investor must always first make an assumption as to which direction they believe the stock price will go up, down, or stay the same.
In the same vein as a bear market, having a bearish assumption means that you believe that the price of the stock will go down over a given time period. Make sense?
Ok, great! Now, let's say that you think that the price of $FB (Facebook's ticker symbol) will be going down sometime in the near future. That may leave you wondering...
What type of strategy would be best suited for my assumptions?
Below you will find a list of bearish option trading strategies (in no particular order):
- Short Stock
- Short Call Spread
- Long Put Spread
- Long Strangle (this can be bearish or bullish, but regardless you're looking for a large move)
- Short Call
- Long Put
- Reverse Iron Condor (can be bearish or bullish - similar to buying a strangle, but you're looking for an even more dramatic move)
- Covered Short Put
- Covered Long Call
- Short Call/Put Butterfly (can be bearish or bullish - does not require a large move)
- Long Put Butterfly (can also be neutral)
- Reverse Jade Lizard (can also be neutral)
- Long Put Calendar Spread (can also be neutral)
It may seem like a long list, but as a trader, it is good to have options. You may never use some of these strategies, and that's perfectly fine! Use only the ones you feel comfortable with. You can always add new strategies to your arsenal as you begin to perfect the mechanics you use for the strategies you are familiar with.
Now that you're equipped with the strategies to place a trade when you have a bearish assumption, let's take a look at the other side of that coin and gain a better understanding of the term "bullish."
The term bullish is the inverse to the term bearish. If I say that the market is bullish, it means that in the given timeframe, the market has been trending upwards.
Do you recall our simple way to remember that bear market means a downward trend? Well, there is a similar adage for bull markets.
When a bull attacks, its horns are pointing upwards towards the sky.
As cheesy as these mnemonic devices are, just remember, they are actually a helpful way to solidify your ability to remember which term means which direction if you do not already have this locked away in the memory bank.
A Bullish Assumption
When placing a trade, if your assumption is that the stock you are researching is going to be going up in a given timeframe, then you have what is called a bullish assumption.
So let's say that you want to invest in $TWTR (Twitter) and think that their stock price will be going up in the timeframe that you are looking at, what type of strategy should you use?
Well, rather than tell you which specific one to use (which is hard, because that's a case by case basis), we will again take a look at a complete list of bullish strategies below.
Below is a list of bullish options trading strategies:
- Buying Stock
- Short Put Spread
- Long Call Spread
- Short Put
- Long Call
- Long Strangle (this can be bullish or bearish, but regardless you're looking for a large move)
- Reverse Iron Condor (can be bullish or bearish - similar to buying a strangle, but you're looking for an even more dramatic move)
- Covered Short Call
- Covered Long Put
- Short Call/Put Butterfly (can be bullish or bearish - does not require a large move)
- Long Call Butterfly (can also be neutral)
- Jade Lizard (can also be neutral)
- Long Call Calendar Spread (can also be neutral)
This is again a very long list meant as a point of reference, not a 'how-to' for the best conditions to implement a certain strategy.
We have made it through all of the animal terminology in this post, but have one last market assumption to cover - a neutral assumption.
Markets/underlyings do not always trend up or down. Many times they move ‘sideways’, meaning that the stock price will bounce around a given range, but the stock never really trades outside of that range (as you see in the example below).
Unlike bearish and bullish, a neutral assumption of an underlying means that you are not biased one way or another. You believe that the stock will continue to trade within the range that is has been without trending up or down for extended periods of time.
There are some strategies for a neutral market assumption, but you'll notice not nearly as many as bullish/bearish assumptions have.
Here is a comprehensive list of neutral options trading strategies:
- Iron Condor
- Short Strangle (can be skewed bullish or bearish, but favors the neutral position)
- Long Call Butterfly (can also be bullish)
- Long Put Butterfly (can also be bearish)
- Jade Lizard (can also be bullish)
- Reverse Jade Lizard (can also be bearish)
- Long Call Calendar Spread (can also be bullish)
- Long Put Calendar Spread (can also be bearish)
There are many different strategies that can be used no matter which direction you think that a stock will move. Choosing the right strategy is just one piece of the pie making up a successful options trader.
Remember to always use strategies you are comfortable with. If/when you try experimenting with new strategies, never risk more than you are comfortable losing.
Also, check out Step Up to Options to learn how more about basic option trades.
Share your market assumptions by tweeting to us @doughtrading!