The NASDAQ composite index fell on Thursday, dragged down by loss in shares of technology companies. The index lost 1.24 percent to 10,791.35.
Losses in shares of Apple, Amazon and Microsoft weighed on the index. Apple’s stock fell 2.3 percent, while Amazon and Microsoft shares lost 1.7 percent and 1.4 percent, respectively. The declines came as the U.S. tech sector came under pressure from reports that the Trump administration is considering tougher regulation on the industry. The Nasdaq is down 2 percent so far this year.
Volatility is a major concern for investors during bear markets, as market declines typically correlate with losses in a portfolio. However, volatility can also be harnessed to generate income and navigate a bear market. There are a number of option strategies that can be used to take advantage of volatility and protect a portfolio during a market downturn.
The first strategy is the Bearish Credit Spread, also known as the Bear Call Spread. This is a neutral/bearish strategy that involves selling an At the Money call option and buying an Out of the Money call option. The investor receives a net credit which also represents the max gain for this strategy. One rule of thumb that we use for this strategy is to only sell a credit spread when the credit received is at least 33% of the vertical width.
The second strategy is the Short Strangle. This is a bearish trade that involves selling both a call and a put option. A short strangle is generally Short Delta (works in a neutral and declining market) but can be adjusted to have a directional bias by picking asymmetric Deltas. Selling both an OTM call and put when volatility is elevated can generate a significant premium during bear markets.
The third strategy is to utilize index options. Index options offer a wide range of advantages and can be used with the strategies above. While the tax benefits of index options are well known, index options can be ideal for navigating turbulent markets. Index options typically offer European settlement and are cash settled at expiration, this eliminates early assignment risk compared to an index ETF option. Additionally, index options are listed on some of the most widely tracked indices, providing diversification from single stock risk. The Nasdaq-100 Micro Index (XND) is a good example of an index that tracks the performance of the Nasdaq-100 index but with a contract size that is better suited for smaller portfolios.