Let's hope the market sentiment prominent during the first trading week of 2016 doesn't set the stage for things to come. The VIX has started spiking up, the broader indexes have all broken critical support levels, the price of crude oil continues to fall...in other words, all roads point to a bearish market. But is it the start of a bearish market or is it a correction?
If you're still holding on to your positions, then there are some option strategies you can incorporate to hedge your positions. One such strategy is to sell bear call spreads.
Take the stock of Apple, Inc. (NASDAQ:AAPL) as an example. The stock closed at $96.96 on January 8, 2016. You could sell the February 95 calls and buy February 100 calls. Your net credit would be $2.50 per share. The best case scenario is if AAPL stays below $95 when your February calls expire. You receive the net credit of $2.50 per share. Yes, your profit is limited but so are your potential losses. The worst case scenario is if the stock rallies above $100 at expiration. In this case you will be assigned on the February 95 call and exercise the February 100 call. Your maximum loss will be $5.00, which is the difference between the two strike prices, minus the net credit, which is $2.50 per share.
Just as we take out insurance policies on our homes and cars, it'll be well worth your time to hedge your positions with appropriate option strategies.