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Playing the Short Side with Vertical Bear Put Debit Spreads

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For me, the glass is always half full, not half empty, and it’s usually darkest just before the dawn. After all, over the past 100 years, markets rise 80% of the time, and that includes the Great Depression.

However, every now and then, conditions arise where it is prudent to sell short, or make a bet that a certain security will fall in price.

This could happen for myriad reasons. The economy could be slowing down. Companies might disappoint on earnings. “Sell in May, and go away?" It works….sometimes.

Other securities have long-term structural challenges, like the US Treasury bond market (TLT). Exploding deficits as far as the eye can see assure that government debt of every kind will be a perennial short-term problem for years to come, but not yet.

Once you identify a short candidate, you can be an idiot and just buy put options on the security involved. Chances are that you will overpay and that accelerated time decay will eat up all your profits, even if you are right and the security in question falls. All you are doing is making some options trader rich at your expense.

For outright put options to work, your stock has to fall IMMEDIATELY, like in a couple of days. If it doesn’t, then the sands of time run against you very quickly. Something like 80% of all options issued expire unexercised.

And then there’s the right way to play the short side, i.e., MY way. You go out and buy a deep-in-the-money vertical bear put debit spread.

This is a matched pair of positions in the options market that will be profitable when the underlying security goes down, sideways, or up small in price over a defined, limited period of time. It is called a “debit spread” because you have to pay money to buy the position instead of receiving a cash credit.

It is the perfect position to have on board during bear markets, which we will almost certainly see by late 2019 or 2020. As my friend Louis Pasteur used to say, “Chance favors the prepared.”

I’ll provide an example of how this works with the United States Treasury Bond Fund (TLT), which we have been selling short nearly twice a month since the bond market peaked in July 2016.

On October 23, 2018, I sent out a Trade Alert that read like this:

Trade Alert - (TLT) - BUY

BUY the iShares Barclays 20+ Year Treasury Bond Fund (TLT) November, 2018 $117-$120 in-the-money vertical BEAR PUT spread at $2.60 or best.

At the time, the (TLT) was trading at $114.64. To add the position, you had to execute the following positions:

Buy 37 November 2018 (TLT) $120 puts at…….………$5.70

Sell short 37 November 2018 (TLT) $117 puts at……..$3.10

Net Cost:………………………….………..………….…............$2.60

Potential Profit: $3.00 - $2.60 = $0.40

(37 X 100 X $0.40) = $1,480 or 11.11% in 18 trading days.

Here’s the screenshot from my personal trading account showing you where I get the price:

This was a bet that the (TLT) would close at or below $117 by the November 16 options expiration day.

The maximum potential value of this position at expiration can be calculated as follows:

+$120 puts
-$117 puts
+$3.00 profit

This means that if the (TLT) stays below $117, the position you bought for $2.60 will become worth $3.00 by November 16.

As it turned out, that was a prescient call. By November 2, or only eight trading days later, the (TLT) had plunged to $112.28. The value of the iShares Barclays 20+ Year Treasury Bond Fund (TLT) November 2018 $117-$120 in-the-money vertical BEAR PUT spread had risen from $2.60 to $2.97.

With 92.5% of the maximum potential profit in hand (37 cents divided by 40 cents), the risk/reward was no longer favorable to carry the position for the remaining ten trading days just to make the last three cents.

I, therefore, sent out another Trade Alert that said the following:

Trade Alert - (TLT) – TAKE PROFITS

SELL the iShares Barclays 20+ Year Treasury Bond Fund (TLT)November, 2018 $117-$120 in-the-money vertical BEAR PUT spread at $2.97 or best

In order to get out of this position, you had to execute the following trades:

Sell 37 November, 2018 (TLT) $120 puts at…………........……$7.80

Buy to cover short 37 November, 2017 (TLT) $117 puts at….$4.83

Net Proceeds:………………………….………..………….…..............$2.97

Profit: $2.99 - $2.60 = $0.37

(37 X 100 X $0.37) = $1,369 or 14.23% in 8 trading days.

Of course, the key to making money in vertical bear put spreads is market timing. To get the best and most rapid results, you need to buy these at market tops.

If you’re useless at identifying market tops, don’t worry. That’s my job. I’m right about 90% of the time and send out a STOP LOSS Trade Alert very quickly when I’m wrong.

With a recession and bear market just ahead of us, understanding the utility of the vertical bear put debit spread is essential. You’ll be the only guy making money in a falling market. The downside is that your friends will expect you to pick up every dinner check.

But only if they know.

Understanding Bear Put Spreads is Crucial in Falling Markets

Testimonial

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Just a quick note of appreciation for your helping me decide to get my clients into (GLD) with a 15% allocation early this year.

It sure has helped me to be more of a hero to my clients this year than a goat...

Best wishes to you and yours! Keep 'em coming.

Brad
Bakersfield, CA.

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Ingenious writing, John, in your Monday morning strategy letter. I forwarded it to all my family and kids, and made my 16-year-old read it out loud to my wife. I made sure he understood what he was reading. I got choked up by the whole article.

Go Ukraine!

Best regards,

Greg

Las Vegas, NV

The Lazy Man’s Guide to Trading

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I like to start out my day by calling readers on the US East Coast and Europe, asking how they like the service, are there any ways I can improve the service, and what topics would they like me to write about.

After all, at 5:00 AM Pacific time, they are the only ones around.

You’d be amazed at how many great ideas I pick up this way, especially when I speak to industry specialists or other hedge fund managers.

Even the 25-year-old day trader operating out of his mother’s garage has been known to educate me about something.

So when I talked with a gentleman from Tennessee in the morning, I heard a common complaint.

Naturally, I was reminded of my former girlfriend, Cybil, who owns a mansion on top of the levee in nearby Memphis overlooking the great Mississippi River.

As much as he loved the service, he didn’t have the time or the inclination to execute my market-beating Trade Alerts.

I said, “Don’t worry. There is an easier way to do this.”

Only about a quarter of my followers actually execute my Trade Alerts, and a lot of them are professionals. The rest rely on my research to correctly guide them in the management of the IRA’s 401(k)’s, pension funds, or other retirement assets.

There is also another, easier way to use the Trade Alert service. Think of it as “Trade Alert light.” Do the following.

1) Only focus on the four best of the S&P 500’s 101 sectors. I have listed the ticker symbols below.
2) Wait for the chart technicals to line up. Bullish long-term “Golden crosses” will set up for several sectors, as with precious metals now.
3) Use a macroeconomic tailwind.
4) Shoot for a microeconomic sweet spot, companies and sectors that enjoy special attention.
5) Increase risk when the calendar is in your favor, such as from November to May.
6) Use a modest amount of leverage in the lowest risk bets, but not much. 2:1 will do.
7) Scale in, buying a few shares every day on down days. Don’t hold out for an absolute bottom. You will never get it.

The goal of this exercise is to focus your exposure on a small part of the market with the greatest probability of earning a profit at the best time of the year. This is what grown-up hedge funds do all day long.

Sounds like a plan. Now, what do we buy?

(ROM) – ProShares Ultra Technology 2X Fund – Gives you a double exposure to what will be the top-performing sector of the market for the next six months, and probably the rest of your life. Click here for details and the largest holdings.

(UXI) – ProShares Ultra Industrial Fund 2X – Is finally rebounding off the back of a dollar that will slow down its ascent once the first interest rate hike is behind us. Onshoring and incredibly cheap valuations are other big tailwinds here. For details and the largest holdings, click here.

(BIB) – ProShares Ultra NASDAQ Biotechnology 2X Fund – With technology, this will be the other hyper-growth sector in the stock market for the next 20 years. How much is a cancer cure worth to stock valuations? Oh, about $2 trillion. A basket approach favors this notoriously volatile sector by rotating in new winners to replace losers.

(UYG) – ProShares Ultra Financials 2X Fund – Yes, after six years of false starts, interest rates are finally going up, with a December rate hike by the Fed a certainty. My friend, Janet, is handing out her Christmas presents early this year. This instantly feeds into wider profit margins for financials of every stripe. For details and the largest holdings, click here.

Of course, you’ll need to keep reading my letter to confirm that the financial markets are proceeding according to the script. We all know that sectors can rotate rapidly, as they have just done.

You will also have to read the Trade Alerts, as we include a ton of deep research in the Updates.

You can then unload your quasi-trading book with hefty profits in the spring, just when markets are peaking out. “Sell in May and Go Away?” I bet it works better than ever in 2024.

For Those Who Invest at Their Leisure

Founding the Mad Hedge Diary of a Mad Hedge Fund Trader

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The Diary of a Mad Hedge Fund Trader is now celebrating its 18th year of publication.

During this time, I have religiously pumped out 3,000 words a day, or 18 newsletters a week, of original, independent-minded, hard-hitting, and often wickedly funny research.

I spent my life as a war correspondent, Marine Corps combat pilot, Wall Street trader, and hedge fund manager, and if you can’t laugh after that, something is wrong with you.

I’ve been covering stocks, bonds, commodities, foreign exchange, energy, precious metals, real estate, and even agricultural products.

You’ve been kept up on my travels around the world and listened in on my conversations with those who drive the financial markets.

I also occasionally opine on politics, but only when it has a direct market impact, such as with the recent administration's economic and trade policies. There is no profit in taking a side.

The site now contains over 20 million words, or 30 times the length of Tolstoy’s epic War and Peace.

Unfortunately, it feels like I have written on every possible topic at least 100 times over.

So, I am reaching out to your, the reader, to suggest new areas of research that I may have missed until now which you believe justify further investigation.

Please send any and all ideas directly to me at support@madhedgefundtrader.com/, and put “RESEARCH IDEA” in the subject line.

The great thing about running an online business is that I can evolve it to meet your needs on a daily basis.

Many of the new products and services that I have introduced since 2008 have come at your suggestion. That has enabled me to improve the product’s quality, to your benefit. Notice how rapidly my trade alert performance is going up, now annualizing at +47% a year.

This originally started out as a daily email to my hedge fund investors, giving them an update on fast-moving market events. That was at a time when the financial markets were in free fall, and the end of the world seemed near.

Here’s a good trading rule of thumb: Usually, the world doesn’t end. History doesn’t repeat itself, but it certainly rhymes.

The daily emails gave me the scalability that I so desperately needed. Today’s global mega enterprise grew from there.

Today, the Diary of a Mad Hedge Fund Trader and its Global Trading Dispatch are read in over 140 countries by 30,000 followers. The Mad Hedge Technology Letter, the Mad Hedge Biotech & Health Care Letter, Mad Hedge AI, and Jacquie’s Post also have their own substantial followings. And the daily Mad Hedge Hot Tips is one of the most widely read publications in the financial industry.

I’m weak in distribution in North Korea and Mali, in both cases due to the lack of electricity. But that may change.

One can only hope.

If you want to read my first pitiful attempt at a post, please click here for my February 1, 2008, post.

It urged readers to buy gold at $950 (it soared to $2,200), and buy the Euro at $1.50 (it went to $1.60).

Now you know why this letter has become so outrageously popular.

Unfortunately, I also recommended that they sell bonds short. I wasn’t wrong on that one, just early, about eight years too early.

I always get asked how long I will keep doing this.

I am already collecting Social Security, so that deadline came and went. My old friend and early Mad Hedge subscriber, Warren Buffett, is still working at 92, so that seems like a realistic goal. And my old friend, Henry Kissinger, is still hard at it at 100 years old.

Hiking ten miles a day with a 50-pound pack, my doctor tells me I should live forever. He says he spends all day trying to convince his other patients to be like me, and the only one who actually does it is me.

The harsh truth is that I don’t know how to NOT work. Never tried it, never will.

The fact is that thousands of subscribers love me for what I do, pay for me to travel around the world first class to the most exotic destinations, eat in the best restaurants, fly the rarest historical aircraft, and then say thank you. I even get presents (keep those pounds of fudge and bottles of bourbon coming!).

Given the absolute blast I have doing this job, I would be Mad to actually retire.

Take a look at the testimonials I get on an almost daily basis, and you’ll see why this business is so hard to walk away from (click here to view them.)

In the end, you are going to have to pry my cold, dead fingers off of this keyboard to get me to give up.

Fiat Lux (let there be light).

Testimonial

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Thanks for the advice, John.

Actually, I just got started with investing as I’ve been living close to the edge raising kids all these years. I had $100K that I could float for a few months so I had it in the Eaton Vance Tax-Managed Diversified Equity Income Fund (ETY) until my old golf buddy/broker told me about you and your Tesla (TSLA) advice.

So, I went all-in on December 30. It’s the best move I ever made. I’m an entrepreneur/risk-taker so I bought as much Apple (AAPL) and NVIDIA (NVDA) on the way down as I could, which obviously turned out far better than I ever hoped.

So, like I said, it seems now or never for me. So, I subscribed to your Mad Hedge Biotech & Healthcare Letter and I’m going to do the best I can with it.

Thanks a “million.”

Greg
Las Vegas, NV

March 9, 2026 - Quote Of The Day

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“War is God’s way of teaching the American people Geography,” said Lydia Polgreen of the New York Times.

They’re Not Making Americans Anymore

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You can count on a bear market hitting sometime in 2038, one falling by at least 25%.

Worse, there is almost a guarantee that a financial crisis, severe bear market, and possibly another Great Depression will take place no later than 2058, which would take the major indexes down by 50% or more.

No, I have not taken to using a Ouija board, reading tea leaves, or examining animal entrails in order to predict the future. It’s much easier than that.

I simply read the data just released from the National Center for Health Statistics, a subsidiary of the federal Centers for Disease Control and Prevention (click here for their link).

The government agency reported that the US birth rate fell to a new all-time low for the second year in a row, to 60.2 births per 1,000 women of childbearing age. A birth rate of 125 per 1,000 is necessary for a population to break even. The absolute number of births is the lowest since 1987. In 2017, women had 500,000 fewer babies than in 2007.

These are the lowest numbers since WWII, when 17 million men were away in the military, a crucial part of the equation.

Babies grow up, at least most of them. In 20 years, they become consumers, earning wages, buying things, paying taxes, and generally contributing to economic growth.

In 45 years, they do so quite substantially, becoming the major drivers of the economy. When these numbers fall, recessions and bear markets occur with absolute certainty.

You have long heard me talk about the coming “Golden Age” of the 2020’s. That’s when a two-decade-long demographic tailwind ensues because the number of “peak spenders’ in the economy starts to balloon to generational highs. The last time this happened during the 1980’s and 19990’s stocks rose 20-fold.

Right now, we are just coming out of two decades of demographic headwind, when the number of big spenders in the economy reached a low ebb. This was the cause of the Great Recession, the stock market crash, and the anemic 2% annual growth since then.

The reasons for the maternity ward slowdown are many. The Great Recession certainly blew a hole in the family plans of many Millennials. Falling incomes always lead to lower birth rates, with many Millennial couples delaying children by five years or more. Millennial mothers are now having children later than at any time in history.

Burgeoning student debt, which just topped $1.5 trillion, is another. Many prospective mothers would rather get out from under substantial debt before they add to the population.

The rising education of women is another drag on childbearing and is a global trend. When spouses become serious wage earners, families inevitably shrink. Husbands would rather take the money and improve their lifestyles than have more kids to feed.

Women are also delaying having children to postpone the “pay gaps” that always kick in after they take maternity leave. Many are pegging income targets before they entertain starting families.

As a result of these trends, one in five children last year was born to women over the age of 35, a new high.

This is how Latin Americans moved from eight to two-child families in only one generation. The same is about to take place in Africa, where standards of living are rising rapidly, thanks to the eradication of several serious diseases.

The sharpest falls in the US have been with minorities. Since 2017, the birth rates for Hispanics have dropped by 27% from a very high level, African Americans 11%, whites 5%, and Asian 4%.

Europe has long had the same problem with plunging growth rates, but only much worse. Historically, the US has made up for the shortfall with immigration, but that is now falling thanks to the current administration's policies. Restricting immigration now is a guarantee of slowing economic growth in the future. It’s just a numbers game.

So watch that growth rate. When it starts to tick up again, it’s time to buy….in about 20 years. I’ll be there to remind you with this newsletter.

As for me, I’ve been doing my part. I have five kids aged 15-34, and my life is only half over. Where did you say they keep the Pampers?

I’m Doing My Part

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Thank John for his ceaseless banter. I enjoy this service so much. Great stories!!!!

I hope our paths cross soon.

Thank you.

Bill
North Carolina

January 8, 2026 Orlando, Florida Global Strategy Luncheon

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Come join me for lunch for the Mad Hedge Fund Trader’s Global Strategy Luncheon, which I will be conducting in Orlando, Florida at 12:00 PM on Thursday, January 8, 2026. A three-course lunch is included.

I’ll be giving you my up-to-date view on stocks, bonds, currencies, commodities, precious metals, and real estate.

And to keep you in suspense, I’ll be throwing a few surprises out there, too. Enough charts, tables, graphs, and statistics will be thrown at you to keep your ears ringing for a week. Tickets are available for $267.

I’ll be arriving early and leaving late in case anyone wants to have a one-on-one discussion, or just sit around and chew the fat about the financial markets.

The lunch will be held at an exclusive hotel near Disneyland, the details of which will be emailed to you with your purchase confirmation.

I look forward to meeting you, and thank you for supporting my research.

To purchase tickets for this luncheon, please click here.