The stock market goes through 3 different cycles.
They are mainly the bull, bear and the channeling market.
Basically, a bull market is when stocks prices go up, a bear market is when stocks price will go down and a channeling market is when stock prices stay stagnant within a range.
Each market will require different strategies to earn money or accumulate wealth.
However, right now we are experiencing a bear market and i will share with you what are the methods of earning money in a bear market.
One of the ways to invest small to earn big is through options.
Options are known in the financial markets as "derivatives.
" That basically means that their value is tied to or derived from the value of their underlying instrument.
For example, the value to buy Microsoft stock will be based on the price of Microsoft stock.
Options are generally known to have a larger risk reward ratio as compared to buying stocks or shorting stocks.
So now that you have a understanding of what options are, how then do we use options to earn money in a bear market? There are two main types of options namely puts and calls.
A call option gives the buyer the right to buy the stock at the stipulated price (strike price) within the time frame given regardless of the changes in the market.
For example, a seller sells me an option for Microsoft of a strike price of $14 for 7days at a price of $6 and the current market price is $15.
So how do these numbers mean profit? I'll put it in an equation for you.
(Current market Price - Strike price - Option price = Profits) So how do u make profits then? A call is bought when u expect the price to go up.
Suppose Microsoft stock price rose to $17.
You exercise your option to buy the stock at $14 and immediately sell at $17 making a $3 profit.
However, also consider that you have spent $2 on the option, so the overall profit is $1.
Not much? However consider this, you are only risking $2 to make $1, a 50% risk reward ratio is hard to find.
We've looked at the upside of options, how about the downside? When will you make a loss? Using the same example, supposed the market price falls to $13 instead.
Exercising your option would be a mindless thing to do as you would buy at $14 to sell at $13? Considering also the price of the option, the total loss would be $3.
However, most normal people would just choose not to exercise the option and only lose $2.
Hence, from the on start, the total loss you can make is already predetermined as the amount you spend buying the option.
A put option is a more popular option in a bear market as it bets that prices will fall while call bets that prices will rise.
How does it work? A put option gives the buyer the right to sell the stock at the stipulated price (strike price) within the time frame given regardless of the changes in the market.
For example, suppose I expect the price of Microsoft to fall I will purchase the put option on Microsoft stocks.
Suppose the current price of Microsoft stocks is $15 and stipulated price (strike price) on the option is $16 and it costs $2 to buy the option.
Once the price falls to $14, if I exercise my option to sell the stock, I will break even.
How? (Strike price - Market price - Option price = Profit).
Suppose the price falls further to $10.
The profit made if I exercise my option to sell would be $4, 200% earnings from exercising the option.
(For those who do not understand how it works, when an option is exercise, the option owner tells the seller of the option to buy the stocks at $16(strike price) and sell it at the current market price of $10).
Since most stocks now are falling and even crashing, a great way to earn from the crisis would be through put options.