I was thinking about this topic at length over the last few days, even soliciting commentary from my advisors regarding this. I’m usually long (bullish) but the current market is clearly bearish, necessitating a short strategy. I think I’ve come up with a good one, so I’ll be testing it out in the next weeks/months and I wanted to write up what my thoughts are on the matter.

By the way, as an aside: it is not true that markets move up or down. However says so lacks experience. In truth, the markets move up, or they move down, or they move sideways.

In any case, I thought there is no good short strategy because a good strategy, in my opinion, is a one for the theta gang. In other words, I want the time value to bleed into my own pocket. Theta, or time value of an option, is the premium that is charged for the time difference between now and the option expiration. Longer-termed options have more time value premium, aka theta. Options expiring, say, today have almost no theta left.

So a good strategy for me is a one that allows me to collect theta premium. This means credit calls, and credit puts. This means selling, rather than buying calls and also selling, rather than buying puts.

So a strategy to sell cash-secured puts is a reasonable one, but it’s a bullish rather than a bearish strategy.

The strategy to buy puts isn’t good in my opinion because you pay, rather than receive, theta premium.

The strategy to sell calls may sound good, but… Historically, I sell covered calls and even if you sell aggressive calls, lets say 0.6 delta, then holding the underlying still makes your position delta-positive (1-0.6=0.4), so you are still losing in a bear market.

The strategy to buy calls is not good because it drains you of the theta value.

I have no comment on actually selling stock short. I’m reluctant to do it because there are costs involved, the cost of borrowing, which sounds like theta so I am avoiding selling stock short.

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Currently, I believe selling credit call spreads may be a viable short strategy for the long term. It may sound obvious but I have to stringently validate and internalize any strategy, for me to believe in it and actually use it. So this slow and painful process of discovery is necessary for me to arrive at the strategies that I will believe in and use, over long term.

So, I thought hey if you buy a deep ITM call (a LEAP) and sell short-term 0.4 delta calls against is, that almost sounds reasonable, right? The strategist in this case fundamentally believes that the markets will go up, as they should due to ongoing economic activity and creation. And, being short+medium-term bearish, this strategy allows income from downward market movement.

But this strategy still has positive delta: a LEAP is 0.9 and selling a 0.4 call against it brings you to 0.5 positive delta – bullish, not bearish.

So the natural next step is to substitute a further OTM call instead of the LEAP,  in order to make the position overall delta-negative. Selling a delta 0.4 call, and buying a further OTM delta 0.3 call, brings to you 0.3-0.4=-0.1 delta overall – negative, bearish! Of course, this is traditionally, and quite simply and commonly, a credit call spread.

So again I’ll be trying this out over the next weeks and months looking how this performs. For the record, here is the current state of the market, the QQQ: