Your 5-Point Bear Market Plan

1. Sell Short: This is when you sell a stock before you own it and buy it back later. The premise is that you expect to sell high and buy low, in that order. But you need to borrow shares first in order to be able to sell them. And of course, the risk is that a stock can go infinitely higher. Your broker must also approve you before you can sell short.
2. Buy Put Options: You can buy put options on a stock or index that you expect to decline. This gives you the right to sell the asset to the seller of the option at a specific price in a pre-specified time. To do so, you must buy a certain number of options contracts - with 100 underlying shares equivalent to one contract. For example, if you think that American Express (NYSE: AXP) is going to decline, you can buy the November $20 puts. This gives you the right to sell the stock at $20 anytime before the third Friday in November, no matter where the stock is trading. If the stock heads lower, your put options should increase in value. Conversely, if the stock is trading above $20, your put expires worthless.
3. Sell Call Options: If you own shares that you don’t want to sell, but think the price may fall, you can sell call options against them. This gives the buyer the right to “call away” your shares at a specific price. Let’s say you own shares of Apple (Nasdaq: AAPL). You can sell the January $90 calls for $19, meaning the buyer has the right to buy your shares for $90 any time before the third Friday in January. No matter if AAPL is trading at $100 at that time, you’ll still be forced to sell at $90. However, if the stock is below $90, the option expires worthless and you keep the $19. You must be approved to trade options if you want to do this.
4. Bear Market Mutual Funds: There are several mutual funds that seek to profit from a bear market. They include the Prudent Bear Fund (BEARX), ProFunds Bear (BRPIX) and Rydex Inverse S&P 500 Strategy (RYURX). Be sure to read their prospectuses and holdings carefully before you take a position. You’ll also be required to invest a minimum amount and pay annual maintenance fees.
5. Bear Market ETFs: If you don’t want to short stocks or indexes, don’t have approval to trade options, or don’t want to pay the higher fees associated with funds, you can buy ETFs (Exchange-Traded Funds) that short various indexes instead. For example, the Short QQQ ProShares (AMEX: PSQ) seeks returns that correspond to the inverse of the Nasdaq 100.