How to trade bearish in an IRA
As one starts learning about trading (or even just learning how to manage their investments themselves) people inevitably hear about shorting or trading bearish. Trading bearish means that one can profit off of a stock going down (see this video here for a quick explanation https://youtu.be/YLe18-n8OC0?t=152).
Many people might be wary of shorting and or don’t know how to do it. Others have heard stories about how risky it is to trade bearish. In reality, the risk profile of a bearish trade is not much different than a bullish trade, especially in an IRA since those account types do now allow one to just short shares.
How do you trade bearish in an IRA when you cannot short shares inside that account? There are actually a few ways to do it, but before we dive right in let me mention one more thing. ALWAYS learn about and practice these instruments BEFORE trying to implement them with real money in your accounts. Create a free account with Real Life Trading to begin learning about how it all works: https://lddy.no/ugop. Usually, the horror stories of someone losing a lot of money shorting come from an inadequate knowledge of how it works or how leveraged these methods can be.
1. Buy an inverse ETF.
a) There are a number of different inverse ETFs (usually based around stock indices)
b) The value of these rise proportionally as the underlying it tracks goes down. For
example an inverse ETF of the S&P 500 will rise in value as the S&P 500 drops so if you are long (own) shares of the inverse ETF, you will profit.
c) Here is a quick list that I found of some inverse equity ETFs: https://etfdb.com/etfs/inverse/equity/
2. Buy put options
a) Most IRAs will let you buy put options if you have the required options approval(ask your broker about this).
b) When you buy a put option you have the right, but not the obligation to force someone else to buy 100 shares per contract of the underlying stock at the chosen price called the strike price.
i. You must pay a premium to the seller of the put option in order to get this right
ii. These can be used to protect profits in a position that you have already.
3. Buy a bearish debit spread
a) This is accomplished by buying a put (long put) and then selling another put at a strike price below the one you just bought (short put)
b) This is cheaper (and thus less risk per contract) than simply buying a put, but your potential gain is capped at the strike price you sold.
Each of the topics above can be a whole article alone, but hopefully this will serve as a starting point for you to learn some terminology and kickstart your journey to learning more about the markets and trading bearish. In addition to these strategies there are “neutral” strategies in which you can even profit from a stock not just going down, but also sideways and even up a little. However that will be a topic for another time. If you want to learn more pop over to our main page here and create a free account with Real Life Trading and start learning!