Bear Spread

Bear Spread

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Bear call spreads are made by purchasing two call options, one long and one short, at different strike prices but with the same expiration date. Bear call spreads are considered limited-risk and limited-reward because traders can contain their losses or realize reduced profits by using this strategy. The limits of their profits and losses are determined by the strike prices of their call options.

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An iron condor involves buying and selling calls and puts with different strike prices when a trader expects low volatility.

Butterfly spread is an options strategy combining bull and bear spreads, involving either four calls and/or puts, with fixed risk and capped profit.

A bull spread is a bullish options strategy using either two puts, or two calls with the same underlying asset and expiration.

Options are financial derivatives that give the buyer the right to buy or sell the underlying asset at a stated price within a specified period.

A Christmas tree is a complex options trading strategy achieved by buying and selling six call options with different strikes for a neutral to bullish forecast.

A strangle is a popular options strategy that involves holding both a call and a put on the same underlying asset. It yields a profit if the asset's price moves dramatically either up or down.

The Basics of Options Profitability

Credit Spread vs. Debit Spread: What's the Difference?

Strategies for Trading Volatility With Options

Which Vertical Option Spread Should You Use?

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James Chen, CMT is an expert trader, investment adviser, and global market strategist. He has authored books on technical analysis and foreign exchange trading published by John Wiley and Sons and served as a guest expert on CNBC, BloombergTV, Forbes, and Reuters among other financial media.

A bear call spread, or a bear call credit spread, is a type of options strategy used when an options trader expects a decline in the price of the underlying asset . A bear call spread is achieved by purchasing call options at a specific strike price while also selling the same number of calls with the same expiration date, but at a lower strike price. The maximum profit to be gained using this strategy is equal to the credit received when initiating the trade.

A bear call spread is also called a short call spread. It is considered a limited-risk and limited-reward strategy.

The main advantage of a bear call spread is that the net risk of the trade is reduced. Purchasing the call option with the higher strike price helps offset the risk of selling the call option with the lower strike price. It carries far less risk than shorting the stock or security since the maximum loss is the difference between the two strikes reduced by the amount received, or credited, when the trade is initiated. Selling a stock short theoretically has unlimited risk if the stock moves higher.

If the trader believes the underlying stock or security will fall by a limited amount between the trade date and the expiration date then a bear call spread could be an ideal play. However, if the underlying stock or security falls by a greater amount then the trader gives up the ability to claim that additional profit. It is a trade-off between risk and potential reward that is appealing to many traders.

Let's assume that a stock is trading at $45. An options trader can use a bear call spread by purchasing one call option contract with a strike price of $40 and a cost/premium of $0.50 ($0.50 * 100 shares/contract = $50 premium) and selling one call option contract with a strike price of $30 for $2.50 ($2.50 * 100 shares/contract = $250). In this case, the investor will receive a net credit of $200 to set up this strategy ($250 - $50). If the price of the underlying asset closes below $30 upon expiration, then the investor will realize a total profit of $200, or the full premium received.

The profit from the bear call spread therefore maxes out if the underlying security closes at $30—the lower strike price—at expiration. If it closes farther below $30 there will not be any additional profit. If it closes between the two strike prices there will be a reduced profit, while closing above the higher strike, $40, will result in a loss of the difference between the two strike prices reduced by the amount of the credit received at the onset.

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Bear Spread is a kind of price spread where you buy either call or put options at different Strike Prices having the same expiration and is used when an investor thinks that a stock price will go down, but it will not go down drastically.
There are several ways you can trade when you feel that a stock will go down.
The strategies mentioned in “a” and “b” are most effective when the stock price goes down drastically. There is no protection in the above two strategies. That is, if the stock price goes up, then there will be unlimited loss in strategy “a” and limited loss in strategy “b.” They help to minimize the initial cost of Strategy “b.” It helps to reach the breakeven point faster.
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So now, if the stock price stays above 100 or 98, then it will be your loss of 2. What will happen if the stock price goes below 98.
Stage 1: Stock Price above 98. You will incur a loss of 2. Because both the put options will expire. 2 was your initial investment
Stage 2: Stock price from 98 to 96. As soon as the stock price crosses 98, the put you bought will be activated. So when the stock price reaches 96, then the gain from put will be 2. Your initial investment was -2, so you will reach Breakeven. This means there will be no profit or no loss at this stage.
Stage 3: Stock Price between 96 to 95. This is the stage where you will earn a profit. As you have already recovered the investment, so you will earn a profit of +1 here.
Stage 4: Stock Price below 95. At this stage, the put that you have sold will be activated. So you will not be able to earn any more profit from this stage. So your Net profit will remain at 1.
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There are two types of bear spread strategies.
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Bear Put Strategy has already explained above, so we will explain the Bear Call strategy here.
You may feel that why they have used call when the strategy is bear. So this strategy is to prove that you can use call options also when you feel that the market will go down.
If an investor is bearish for the market, but he is not so bearish. He thinks that the stock price will go down but will not go down drastically. He should buy a put option and minimize the cost of premium paid. He should sell another out of the money put option. The premium earned from the out of the money will help to lower the initial cost and help to reach breakeven point fast.
Bear Spread Strategy is a kind of price spread where you buy similar options like Call and Put at different strikes but the same maturities. So these strategies are designed in such a way that both profit and losses can be limited. The share market Share Market The share market is a public exchange where one can buy and sell company shares based on the demand and supply of shares. read more has become extremely unpredictable. The market mostly runs on sentiments now. So one must protect himself in case he is taking any position. Bear spread strategies give protection.
This has been a guide to what is Bear Spread. Here we discuss two types (Bear Call and Bear Put), and an example of bear spread along with advantages and disadvantages. You may also have a look at the following articles –
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A bear spread consists of a buy leg and a sell leg of different strikes for the same expiration and same underlying contract. This strategy will pay off in a falling market, also known as a bear market, that is why it is referred to as a bear spread.
Bear spreads can be constructed from either going long a put spread or short a call spread.
A trader believes that the market will have a moderate drop before the options expire. If the underlying market was trading at 100, he would buy a 95 put for $3 and sell the 90 put for $2.
By selling the 90 put, he receives a premium which offsets the cost of the 95 leg. The total cost of the spread is $1. The breakeven point for the spread is 94: the 95 strike minus the cost of the spread.
The best-case scenario is if the market finishes at or below 90. Because the 95-90 put spread will pay off $5. This is the maximum payoff for the spread, regardless where the underlying finishes. If we subtract the $1 cost of the spread, the total profit for the trade will be $4
Assume the underlying finished at 87. The 95 put will pay the trader $8, but he will need to payout $3 on the 90 put. If the market finishes at 70, the 95 put will pay the trader $25, but he will need to payout $20 on the 90 put.
The worst-case scenario is if the market finishes at or above 95. Because both the 95 and 90 put expire out-of-the-money and are therefore worthless. So, the trader loses the full cost of the spread, $1. If the trader purchased only the 95 put at $3, his loss would be $3 versus $1.
If the underlying finishes at 92.5, the long 95 put will be worth $2.50 and the short 90 put expires worthless. The trader’s payout of $2.50 minus the $1 cost of the spread gives him $1.50 profit.
If the trader bought only the 95 put, his payout would still be $2.50, but that is less than the $3 he would have paid for the 95 put alone.
Selling a call is another way to be bearish on the market by allowing you to collect a premium that you keep if the underlying futures finish at or below the strike price.
Instead of buying the 95-90 put spread, we can sell the 90-95 call spread. This would entail selling the 90 call and buying the 95 call, which would result in a $4 credit with the underlying future trading at 100.
The breakeven point for this spread is 94: the 90 strike plus the spread credit of $4. This is the same breakeven point as the put bear spread.
If the market finishes below 90, the calls expire worthless. Therefore, the trader keeps the $4 he received by selling the call spread.
If the market finishes at 97, the 90 call is worth $7 and the 95 call is worth $2 . Therefore, the call spread is worth $5 dollars. The trader received $4 and must now payout $5, resulting in a $1 loss.
If the market finishes at 92.5, the 90 call is worth $2.50. The 95 call expires worthless. So, the trader must pay out $2.50 from his $4 credit. Resulting in a $1.50 profit.
These scenarios have the same outcome whether we sell a call spread or buy a put spread to create a bearish position. Traders still want the market to below the high strike of the spread.
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A bear spread is a strategy used in options trading. A trader purchases a contract with a higher strike price and sells a contract with a lower strike price. This strategy is used to maximize profit of a decline in price while still limiting any loss that could occur from a steep decrease in price.
The bear spread is an advanced option strategy, to learn more about option basics, please click here for a tutorial on Profiting from Options .
To enter into a bear spread, an investor might own a put option contract for Company XYZ with a strike price of $150, purchased when Company XYZ was at $100 per share.
The price of Company XYZ drops. The investor, convinced that Company XYZ’s stock will not return to the original $100 at which he first purchased it, much less reach the $150 strike price, decides to use the bear spread strategy in the hope of reducing the risk of a loss.
He sells his current put option contract in the market and uses the proceeds from the sale to purchase a call option contract for the same underlying security . The new call option contract has a strike price of $50. This way, assuming the stock price continues to move in a downward direction, the investor will be able to purchase Company XYZ’s stock at a lower price.
This allows the investor to have a better chance of profiting. For example, the stock reaches $80, the investor actually profits $5 (1 contract at $100 and 1 contract at $50 = 2 contracts at $75). However, without using the bear spread, the investor would have lost $20 (1 contract at $100 – final price of $80 = $20 loss).
The bear spread strategy is one of many that enables investors to reduce their risk while still remaining in the options market .
The bear spread occurs because the investor's attitude has become bearish toward the underlying stock and decides to pursue a way to limit the risk in a trade but still allow a possibility for profit .
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