Bear spread
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In options trading, a bear spread is a bearish, vertical spread options strategy that can be used when the options trader is moderately bearish on the underlying security.
Because of put-call parity, a bear spread can be constructed using either put options or call options. If constructed using calls, it is a bear call spread. If constructed using puts, it is a bear put spread.
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[edit] Bear call spread
A bear call spread is constructed by buying call options of a certain strike price and selling the same number of call options of lower strike price (in the money) on the same underlying with the same expiration month.
[edit] Example
Consider an arbitrary stock quoting at $100 (lot size = 100) in this month. The call option for this month for strike price of $105 is at $2 and the call option for this month for $95 is trading at $7.
The trader can buy the $105 call option (outflow of $200) and sell the $95 call option (inflow of $700). The total inflow will be $500.
The trade will be profitable when the stock ends below 100.
The max loss is 105-95-5=5 per share(if the share price ends at or above 105), max profit is 5 per share. when the share price ends at or below 95.
[edit] Bear put spread
A bear put spread is constructed by buying higher striking in-the-money put options and selling the same number of lower striking out-of-the-money put options on the same underlying security and the same expiration month.
The options trader hopes that the price of the underlying security drops, maximizing his profit when the underlying security drops below the strike price of the written option, netting him the difference between the strike prices minus the cost of entering into the position.
[edit] See also
[edit] References
- McMillan, Lawrence G. (2002). Options as a Strategic Investment, 4th ed., New York : New York Institute of Finance. ISBN 0-7352-0197-8.
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