The terms “bullish” and “bearish” are terms that are bandied about stock market gurus and financial commentators with great regularity, particularly in today’s market, which has been ripe with bearish reversals and bullish rebounds. New option traders often hear these discussions and are uncertain about the real impact of these trends. Let’s touch on this just briefly.
Consider this – If Google or some other major industry comes to your town and brings new jobs and adds money to the economy, then chances are the other businesses in your area will experience an increase in business. If your town loses a major employer, the other local businesses may report a decrease in business because less money is circulating.
In the same way, economic trends influence Wall Street, and stocks have a herd effect, so to speak. When economic trends are on the rise and equities are increasing in value because investors are confident in the economic future of the market, then we’re said to be in a “bull market,” or traders are said to be “bullish”. On the other hand, in times of economic distress or uncertainty, or a dramatic event makes the market “jittery,” then stocks may decline in value, and analysts say we’re in a “bear market,” or traders are “bearish”.
Stocks rise and fall on a daily basis, and you don’t assign the terms “bull” or “bear” based on one day or a week’s performance – and the terms are relative as well. The market can be “bearish” for a period of time when other economic forecasts seem uncertain. On the other hand, the market can turn “bullish” when certain indicators point to economic expansion.
In a bull market, when the overall market is going up, successful option traders buy and sell their Call Options. It is counterproductive to go against the flow of the market, or, to express this concept another way, it doesn’t make sense to ignore the upward bias of the market.
Likewise, in a bear market, when the overall market is trending to lower stock prices, then successful option traders consider purchasing and selling their Put Options.
The past four days in the market have brought bearish reversals with the major indices opening high and then ending each day with small gains or incremental losses. With the current volatility in the market, short-term option traders can make gains on all this price movement. However, it will be important to use a specific trade strategy with clear entry/exit signals to avoid being fooled by short-term market corrections and trend reversals that only benefit day traders.
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