Traders with a little experience should be able to generate the information below from a previous article on bullish option strategies, the following information is designed to help the options novice begin trading.

NOTE: Before trading options on a regular basis, there is much more information that you should want to assimilate. 

Some Basic Bearish Option Strategies

For the bearish trader, the most common strategy is to buy puts or put spreads.


An alternative is to sell calls or call spreads.

• Buy put options. It is important to know which options to buy and which to avoid. If you decide to buy options, I encourage you to buy put options that are in the money. Translation: Buy puts where the strike price is higher than the current stock price. Warning: It is tempting to invest as little cash as possible and buy low-priced put options (where the strike price is lower than the price of the stock). Please avoid doing that because the chances of success are small.
  
  It is also important to understand whether current option prices are relatively cheap or expensive. Alas, it takes an understanding of implied volatility (and that is a topic that must wait until you learn about volatility and also how options are priced) before you can appreciate whether options are priced reasonably. That is okay for now, but plan on reading about implied volatility before becoming an active trader.
  
  Be careful that the options expiration date comes after your predicted stock price change. After an option expires, it is too late to profit when the stock price declines.
  
   

• Buy put spreads. In addition to buying puts, the trader also sells one put option (with a lower strike price and the same expiration date). For example, with XYZ trading near $47 per share, a typical put spread (often referred to as a "bear put spread") consists of:
  
  Buying XYZ puts with a strike price of 50 and 
  Selling an equal number of XYZ puts with a 45 strike price.
  
  The premium generated from selling the $45 put helps to offset the cost of buying (the more expensive) in-the-money $50 put.

 

• Sell call options. Be aware that very few brokers allow novice traders to sell call options unless they own stock or another call option. This limitation does not apply when selling puts. The sale of naked (unhedged) call options is thought to be far too risky for any option trader -- and especially for novices who may not know how to avoid blowing up a trading account. Why? Because the theoretical loss is unlimited (if you believe that the price of any stock can theoretically increase indefinitely). NOTE: No broker objects to selling stock short, despite the fact that it has the same (theoretical) chance of losing an unlimited sum. This is just one example where option traders are treated unfairly by the powers that be.
  
  Sell only out-of-the-money call options. Translation: The call strike price is higher than the current stock price. Warning: Never sell more calls than your account can tolerate. Stock prices can behave irrationally, and it is best not to expose yourself to the possibility of a gigantic loss The following strategy is far less risky.

 

• Sell call spreads. Sell one out-of-the-money call and buy (an even farther out-of-the-money) call. The latter option is bought for protection (i.e., it limits losses).  For example, with the stock trading near $47 per share, you may want to buy calls with a strike of $55 and sell calls with a strike of $50. The cash premium that you collect (the call sold is more expensive than the option bought) represents your maximum possible profit for the trade. 

These are four bearish trade ideas for the newer option trader, If you understand the rationale for trading spreads instead of single options, then I encourage you to trade spreads.