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How To Protect Yourself In A Bear Market

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Apple Inc. NASDAQ:AAPL, Walt Disney Company The NYSE:DIS - How To Protect Yourself In A Bear Market

Walt Disney Co DIS 1.18% is down 19 percent in the last two and a half weeks. Just in the last month, Apple Inc. AAPL 6.12% tanked 15 percent. Twitter Inc TWTR 0.5% puked over 27 percent in the same time frame.

If this scares you and you believe we are entering a bear market, there are ways to protect yourself. There are actually several ways to protect yourself and even make money from a stock market that is going down.

Short Stocks

You can short stocks. If you have never shorted a stock before, this is what happens in simple terms. You borrow stock, you sell the stock, and eventually you have to buy the stock back eventually to return the stock that was borrowed. Traders should be aware though that the potential loss from selling short is unlimited.

Buy Put Options

You can buy put options to protect stocks that you currently own, or just as a trade on a stock you believe is going to drop. A put is the right to sell a stock at a certain price within a set period of time.

Here is an example. A stock is trading at 50, you buy a put with a strike price of 49. The strike price is the price at which you can put the stock to someone. You pay 1 for the option. If the stock drops to 45, your one dollar option increases to at least 4 (the difference between the 49 and the 45). If the stock...