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A friend warned me not to be over confident in my rookie years buying stocks. He said during a bull market, it is very easy for everyone to look like a winner. Can the reverse be said for rookies that attempt short selling and using put options during a bear market? That is, most rookies can make a fortune short selling and using put options during a bear market?


EDIT

Or put another way, on average does the ease of success rookies experience investing in a bull market translate equally as well to the ease of success rookies experience using short selling and put option tactics in a bear market?

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    I doubt most rookies can make a fortune, period.
    – chepner
    Commented Dec 18, 2019 at 21:16
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    @chepner Joined to upvote your comment. Well, no, but I would've lol... Commented Dec 19, 2019 at 0:49
  • If you know which way the market goes tomorrow you can make a lot of money regardless. Yes people get lucky and buy stocks in a continuing bull market and some people get lucky and short stocks in a continuing bear market. In either case they likely both lose when the trend reverses
    – xyious
    Commented Dec 20, 2019 at 21:38
  • @xyious - Everyone loses when the market reverses, counter to their directional bet. Even Buy & Holders. And at certain times, you can make a lot of money without knowing 'which way the market goes tomorrow'. :->) . The first step is the hardest. It's easier after that, particularly when the market cooperates. Commented Dec 20, 2019 at 22:14

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Your friend's advice is good advice. You should never be over confident in the financial markets regardless of your investment/trading skills and experience.

Yes, you can make a lot of money in a bear market via put buying and/or the shorting stocks and ETFs. But rookies are not likely to do so - unless they get lucky - because they lack the risk management skills to manage the trades.

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  • Also rookies don't short stocks. If they do they likely won't be in the market for a long time anyway.
    – xyious
    Commented Dec 20, 2019 at 21:37
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    @xyious 30 - Good point... but a lot of rookies buy options without a clue how they work. Commented Dec 20, 2019 at 22:11
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I'm not sure what your question is. If your bet happens to be the same way the market goes, you'll make money. If you buy stocks, you're betting they'll go up. So if they go up, you'll make money. If you sell them short, or you buy puts, then if they go down, you'll make money. It's like saying that if the roulette wheel comes up black, then it's easy to make money by betting on black, and if the roulette wheel comes up red, then it's easy to make money betting on red.

Since the market overall goes up, bull markets on average are stronger than bear markets, so betting against the market in a bear market doesn't make as much money as betting on the market in a bull market, but betting against the market in a bear market is still a profitable thing to do. The key, though, is that there's no way to know ahead of time when there's going to be a bear market. Like with the roulette wheel, although people who bet on red when the wheel comes up red win money, "Bet money on red when the wheel comes up red" is not a viable strategy. That's not how bets work.

Rookies don't generally bet against the market, but of those who do, and who happen to enter during a bear market, they make money. But I'm not sure what relevance you think this might have. If you're asking whether it's possible to commit to a particular strategy, and have a chance that everything will go your way and you'll make money just from chance, then yes.

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  • Bull markets are stronger than bear markets in terms of length and total gain but not in terms of velocity. Have you ever seen a bull market gain 50% in 15 months or so? Twice in the past 20 years we've seen the market lose that 50% in that time frame. Going short on a market that's losing 50% makes more money than the converse, in terms of time. You don't need to predict a bear market ahead of time. You only need to react to it as it unfolds. You had to be oblivious not to recognize in 2008 that the the economy and market was crashing. Or just fear based and paralyzed into inaction. Commented Dec 19, 2019 at 4:25
  • @BobBaerker You have to know ahead of time whether we are still in a bear market. Knowing that we were in a bear market today doesn't help you decide what to do tomorrow. Commented Dec 19, 2019 at 4:36
  • "Knowing that we were in a bear market today doesn't help you decide what to do tomorrow." A bear market isn't a today and tomorrow event. In the past 90 years, there have been 8 bear markets lasting from 6 months to almost 3 years, dropping from 22% to over 80%. At some point it kinda becomes obvious that it's a bear. A key part of going short by buying puts is position money management during the decline but I suspect you don't know much about that nor much about shorting. Have you ever even shorted a stock or bought puts in a down market? Commented Dec 19, 2019 at 4:52
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    @BobBaerker "In the past 90 years, there have been 8 bear markets lasting..." That's irrelevant. The market is a random walk. Knowing what happened in the past doesn't tell you what will happen. Being able to look back in hindsight and say it was a long bear market doesn't help you in the moment. "At some point it kinda becomes obvious that it's a bear." It can't be obvious that the prices will fall, because if it were, then that fall would already be priced in. Commented Dec 19, 2019 at 5:09
  • Spare me the random walk nonsense regarding how to react to a declining market. Nothing tells you what will happen tomorrow. What you can recognize is that severe market downturns such as 2000/2008 do not happen overnight. For those who aren't oblivious, it becomes obvious that market metrics are deteriorating - economic indicators turn down, earnings disappointments revisions and analyst downgrades increase, the VIX increases, all beginning long before the crisis becomes acute. Where were you 10 years ago? Uninvested or were you hiding for 15 months waiting for your market pain to stop? Commented Dec 19, 2019 at 18:27
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Short-selling financial instruments is a very risky strategy. When the stock you short-sell ends up rising for some reason (which can always happen, even in a "bear market"), you will have to pay whatever the price is at the expiration date. So you can end up in a theoretically unlimited amount of debt. One risk mitigation strategy for this is to also buy a call-option for that stock, so you can not lose more than the strike-price of the call option (instead of buying the stock you short-sold at market price, you can exercise the call option to obtain it for the strike price). But if you do that, then the stock needs to fall even further to make you money, because you need to recover the cost for the call option.

Buying put-options is a bit safer, because in the worst case the stock price never goes below the strike value of the the option and when the expiry date is reached the option has a value of $0. So with put-options you can "just" completely lose the money you invested, but not more.

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    +1 but... Buying a call to protect a simultaneous short equity position is equivalent to buying a put whichis therefore the better choice (less slippage). Your maximum loss explanation is incorrect. With a protective call, you cannot lose more than the cost of the call (not the strike price) plus any OTM, if any. A way to mitigate the mitigation (the cost of the protective call) is to sell an OTM put, creating a short stock collar which is equivalent to a bearish vertical which is also the better choice. Theoretically unlimited loss? Have you seen any that have gone to infinity? (wink) Commented Dec 19, 2019 at 18:39
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No. Shorts and puts are complicated, perilous products in any market; that is after all the point of a derivative: to amplify risk/reward. (Yes, this is me saying "risk" instead of "volatility", because those products aren't in play long enough for risk to become volatility).


On the other hand, you can make a lot of money buy buying-long lots of shares that are underpriced due to the bear market, then sitting on the stocks until the market recovers.

You don't even have to be clever to do that. You can even do it in an index fund, to diversify your risk with minimal overhead.

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  • And this answers the OP's question how? Commented Dec 19, 2019 at 4:27
  • @BobBaerker Sorry, implied it; rectified. Commented Dec 19, 2019 at 18:17

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