The stock market is never steady forever; it can fluctuate now and then. It is all about timing, and people who have a thorough understanding of the various instruments going up and the securities markets going down can find ways to bet against the securities market, and eventually, make money from others’ losses.
A consecutive downturn balances every upturn in the securities market and the share markets players take advantage of this downturn to make their fortune. Investing against the market may sound a little weird, but instead of just throwing your money into the securities market and then forgetting it for years in the hope of getting high yields, it is better to invest against the markets. Here are some of the strategies discussed that will answer how to bet against the stock market when it is crashing.
1. Using Options
Using options is the most versatile and leverage inducing strategy that gives people the ability to bet against equity. However, this method is not suitable for people who do not have a thorough knowledge of options trading.
An option is a kind of derivative security. To put it more simple, an option is a contract allowing an investor to buy or sell an underlying instrum
ent like an ETF (Exchange Traded Fund) or security or even an index at a certain price over a while.
Thus, options trading is just trading an option or an index that is generally done with securities either on the bond markets or the securities market or ETFs like S&P 500 or iShares U.S. Consumer Services ETF, etc. Buying and selling of the option or index are done on the options market, allowing trading of contracts ba
sed on securities. Buying an option or index that allows one to buy shares at a later period is called a “call option/index,” whereas on the other hand, buying an option or index that allows one to sell shares at a later period is called a “put option/ index.”
When you buy a call option, the strike price of an option for the stock will be determined based on the current price of that particular stock. If
the strike price of an option for the stock is under the current share price of the stock, it’s considered “in the money.” However, for put options (right to sell), things are a little different; when the strike prices are below the current share price it is considered “out of the money” and vice versa. It is important to note that any “out of the money” option, whether it is a call option or a put option, is considered worthless at expiration. Therefore, when trading against the securities market and to have an “in the money,” it is always better to buy the put options. Moreover, call options are generally bullish, while put options are bearish.
Sometimes the best way to invest against the market is to buy a put option. It gives you the right(but not the obligation) to exercise the option and simultaneously sell the index at the predetermined strike price. This way, you can easily get to know your maximum risk despite the index going very high at a point of time, which is the price that you have paid for buying the option.
Thus, you can purchase an options contract (call or put) to buy or sell a stock at a specific price at a much later date. Purchasing an option gives you the ability to invest against the market.
2. Short the shares to earn a fortune
Shorting is another way to bet against the securities market. Shorting a stock does not mean owning the stock at that current period. When an individual short a stock (short market ETF like S&P 500), it implies that he agrees to sell the stock to another individual at a particular time, to buy that same stock at a lower price later on. The person shorting the S&P 500 or any other stock after selling his stock waits for a specified period in the hope that the stock will go down when he can repurchase the stock, with an intention to sell them once again once the price hits the desired price.
This ‘short the market’ technique should be implemented very cautiously and should not be used by people who are not so conversant with ETFs, share market fluctuations, and shorting. It is more like gambling, where people bet against the falling prices of stocks. As the trader who is behind the etf that shorts the market, has the right to sell stocks that he does not own, it would end up costing him millions if the stock price surprisingly spikes in value. But, if a person is fairly certain that the stock will hit its low, then this method is the most lucrative one to bet against the crashing market short ETF.
3. Trading Inverse ETFs
People who are not so confident about trying the above two methods (buying an option or short the stock market) for betting against the share market can try this method of trading inverse ETFs. This method allows the trader to bet against the market without going to all those complexities of shorting of stock or options trading. However, this method has a drawback to this method; this technique does not allow traders to bet against specific stocks as in shorting or an option trading; here, trading can only be done in the broader markets, which is risky at times.
These methods take advantage of the share market volatility; as soon as the traders can sense that the stock prices will tank to its lowest value, betting against the overall market becomes a lucrative business. But for that, traders need to have thorough expertise about the stock movements, and any mistake in predicting the value of the stocks can lead to a devastating loss and eventually may affect your personal finance. Therefore, you must be very careful while performing these trades, because as quickly as you can boost up your personal finance, it may also cost you triple of your fortunes if you lose.
However, this is to be remembered that betting against the share market is not a long-term investment plan; rather, it is an emergency plan that can be used to limit your financial liabilities from losses. Sometimes day traders use these strategies as temporary solutions to get out from a financial heck. Choosing between put or a short will depend on your risk appetite.
FAQs
How do I bet on stocks going down?
You can short stocks, buy put options, or trade inverse ETFs for S&P 500 and many more to bet on shares that are going to be at their lowest value. One can improve his financial status with the help of index trading. Amongst these tactics, trading on Inverse ETFs are the most popular choices for seasonal traders because they find it more convenient.
Can you bet against the stock market?
Yes, you can make money by betting against the stock markets. But for making the correct bet, you need to be perfect about the timing when the securities market crashes.
What does it mean to bet against the market?
Betting against the stock market means taking advantage of the fall in the value of the stocks, which is very common due to the high volatility of the share market.
What is the best ETF to short the market?
Inverse ETFs are the best. Vanguard Value ETF, S&P 500, iShares U.S. Consumer Services ETF, etc. are amongst the best ETFs to invest at the moment.
