Options Trading Fundamentals

Bullish and Bearish

Q: When is a bear market officially considered to have started?

The most widespread convention is a fall of 20% or more from the previous high, measured on a benchmark index using closing prices, not intraday highs. It is a useful but arbitrary definition: no body declares it officially and the 20% threshold has no theoretical basis. What does distinguish a genuine bear market from a deep correction is its duration and the breadth of deterioration across sectors.

Q: Why are puts more expensive than equivalent calls?

Because of skew, which reflects the real asymmetry in equity behaviour. Declines are faster and more correlated than advances, and there is also structural demand for protection from institutional managers who must hedge portfolios. That persistent demand makes out-of-the-money puts expensive. It is useful information: if you are buying protection, you are paying the expensive side of the market, and it is worth considering structures that finance part of that cost.

Q: What does "neutral" mean in options?

That your view is not about direction but about range: you expect price to stay within a band. It is a view the underlying cannot express — with shares you can only be long or short — and options can, through iron condors, short strangles or butterflies. On top of that, a neutral position typically wins from the simple passage of time, something impossible when trading the asset directly.

ES: Alcista y Bajista (Bullish y Bearish) PT: Altista e Baixista

The basic vocabulary of direction: what each term means, where it comes from, and why in options being bullish or bearish is not enough.

What Each Term Means

Being bullish on an asset means expecting its price to rise. Being bearish means expecting it to fall. The terms apply to very different horizons and it is worth specifying which: you can be bearish short term for technical reasons and bullish long term for fundamental ones with no contradiction at all. Applied to the market as a whole, a bull market is conventionally defined as a rise of 20% or more from a relevant low, and a bear market as a fall of 20% or more from a high; declines between 10% and 20% are called corrections.

The Origin of the Animals

The most accepted explanation of the terms points to how each animal attacks: the bull charges by tossing its horns upward, while the bear strikes downward with its paw. There is a second documented historical explanation for the bear, from the fur trade: middlemen sold skins they did not yet own, hoping to buy them cheaper later — a practice known as selling "the bear’s skin before catching it", which is exactly the logic of a short sale. Whatever the origin, the association took hold in Anglo-Saxon financial vocabulary in the eighteenth century and has stuck ever since.

The Asymmetry Between Rises and Falls

Bullish and bearish are not mirror images, and that asymmetry has direct consequences for option prices. Markets rise slowly and fall fast: bull markets typically last years with moderate slopes, while bear markets are shorter and far more violent. In a decline, correlations between stocks spike and everything falls together; in a rally, the advance is more sectoral and orderly. That asymmetry is the structural reason for volatility skew in equities: the market systematically pays more for out-of-the-money puts than for equivalent calls, because the perceived — and realised — risk is on the downside.

In Options, Direction Is Not Enough

Here is the essential difference from trading shares. In shares, being bullish translates into a single action: buy. In options, the same bullish view admits completely different structures depending on two additional dimensions. Magnitude and horizon: if you expect a 3% rise over two months, buying out-of-the-money calls is a poor choice even if you are right. And the volatility environment: with a high IV Rank, the correct bullish structure is a bull put spread that collects premium; with a low IV Rank, a bull call spread that pays it. Choosing the wrong structure for the right environment is the most common way to get the direction right and lose money.

The Intermediate Shades Options Allow

Between bullish and bearish sit positions the underlying cannot express, and they account for much of the appeal of options. Neutral: expecting price not to move much, tradeable with iron condors or short strangles. Mildly bullish: believing it will rise a little, or at least not fall, tradeable with bull put spreads that also win if price simply stands still. Volatile without direction: expecting a large move without knowing which way, tradeable with long straddles or strangles. And bearish with a floor: expecting a limited decline, tradeable with bear put spreads. That granularity is why an options trader frames a view in four dimensions rather than one.

Frequently Asked Questions

When is a bear market officially considered to have started?

The most widespread convention is a fall of 20% or more from the previous high, measured on a benchmark index using closing prices, not intraday highs. It is a useful but arbitrary definition: no body declares it officially and the 20% threshold has no theoretical basis. What does distinguish a genuine bear market from a deep correction is its duration and the breadth of deterioration across sectors.

Can I be bullish and bearish on the same asset at once?

Yes, if they refer to different horizons, and it is a perfectly coherent stance. You can be bearish over a month for technical reasons — price has risen too fast, there is immediate resistance — and bullish over two years for fundamental ones. Options let you express exactly that combination: for instance, a long LEAPS call as structural exposure with short-dated calls sold against it.

Why are puts more expensive than equivalent calls?

Because of skew, which reflects the real asymmetry in equity behaviour. Declines are faster and more correlated than advances, and there is also structural demand for protection from institutional managers who must hedge portfolios. That persistent demand makes out-of-the-money puts expensive. It is useful information: if you are buying protection, you are paying the expensive side of the market, and it is worth considering structures that finance part of that cost.

What does "neutral" mean in options?

That your view is not about direction but about range: you expect price to stay within a band. It is a view the underlying cannot express — with shares you can only be long or short — and options can, through iron condors, short strangles or butterflies. On top of that, a neutral position typically wins from the simple passage of time, something impossible when trading the asset directly.

How do I know if the market is in a bull or bear phase?

No indicator determines it reliably in real time, and the labels are almost always applied in hindsight. The most-used references combine several signals: where the index sits relative to its 200-day moving average, breadth — how many stocks are participating in the advance — the volatility regime measured by the VIX, and the term structure of that volatility. None is infallible, and their value lies in agreeing with each other rather than being used alone.