How to trade in a bear market

When taking Index options, contracts are always “European exercise”, meaning they can’t be exercised before the expiry date. However, these positions can be sold on the open market to close the position. Index options are always cash settled, as you can’t deliver an index.

When taking Equity options, contracts are generally “American exercise”, meaning they can be exercised at any date on or before expiry. Alternatively, your contracts can be sold on the open market to close the position. Equity options are stock settled, so if you choose to exercise your put option, you’re required to deliver the physical stock.

US ETO trading is available with a Commsec International account and a valid options agreement form, providing exposure to US equity and index options. Because ETOs are a leveraged product and give you access to relatively higher priced securities, orders are limited to ten contracts per transaction (to limit risk to both our clients and to CommSec). CommSec International allows you to purchase call and put options, or to sell covered calls, but we don’t facilitate naked/uncovered positions.

To find out more about exchange traded options, call CommSec on 1800 245 698 (8am to 5:30pm, Monday to Friday, Sydney time).

Inverse exchange traded funds (ETFs)

Inverse ETFs are exchange traded funds that are generally constructed using a combination of derivatives that aim to profit on declines in a benchmarked indexes value. They’re commonly referred to as “bear ETFs”.

Several ETF providers also provide leveraged inverse ETFs. These ETFs attempt to provide 2-3 times the return of an unleveraged inverse ETF in a falling market. Keep in mind, these leveraged products are generally constructed for speculation, so they’re rarely designed to be held for longer than a few days.

Before making an investment in these products, it’s important to read the prospectus to understand how expenses are calculated and charged. This type of product is effectively an actively managed fund, as it must allow a daily rebalance to maintain leverage.

To find out more about inverse exchange traded funds, call CommSec on 1300 361 170 (24 hours, US trading days).

MINI warrants

MINI warrants are a type of trading product where an investor can get full exposure to an underlying security by only paying a fraction of the price of the security. The warrant issuer provides the difference in cost.

The attraction is that the investor may benefit from movement in the underlying security without having to outlay significant funds. For example, say an investor trading during a market downturn is looking to potentially benefit from the price of underlying securities falling. In this scenario, the investor could use a selection of MINI warrants to take a “short” position in an indirect fashion.

All price movements on a MINI warrant move on a 1:1 basis compared to the underlying security. For example, if a security falls by $1.00, a MINI warrant over that security benefitting from a decrease in price will improve in value by $1.00.

There are MINI warrants available over a wide selection of exposures, including 300 ASX listed stocks, as well as overseas indices, commodities, and currencies.

To trade a MINI warrant on your CommSec trading account, you’ll need to complete a warrant agreement form to show you understand how these products operate and what risks are involved. Once this is successfully completed, you’ll be given access to place an order.

To find out more about MINI Warrants, call CommSec on 13 15 19 (8am to 7pm, Monday to Friday, Sydney time).