In options trading, a bear spread is a

bearish Market sentiment, also known as investor attention, is the general prevailing attitude of investors as to anticipated price development in a market. This attitude is the accumulation of a variety of fundamental and technical factors, including p ...

vertical spread In options trading, a vertical spread is an options strategy involving buying and selling of multiple options of the same underlying security, same expiration date, but at different strike prices. They can be created with either all calls or all p ...

options strategy Option strategies are the simultaneous, and often mixed, buying or selling of one or more options that differ in one or more of the options' variables. Call options, simply known as Calls, give the buyer a right to buy a particular stock at that ...

that can be used when the options trader is moderately bearish on the underlying security. Because of

put–call parity In financial mathematics, put–call parity defines a relationship between the price of a European call option and European put option, both with the identical strike price and expiry, namely that a portfolio of a long call option and a short put ...

, a bear spread can be constructed using either

put option In finance, a put or put option is a derivative instrument in financial markets that gives the holder (i.e. the purchaser of the put option) the right to sell an asset (the ''underlying''), at a specified price (the ''strike''), by (or at) a s ...

s or

call option In finance, a call option, often simply labeled a "call", is a contract between the buyer and the seller of the call option to exchange a security at a set price. The buyer of the call option has the right, but not the obligation, to buy an ...

s. If constructed using calls, it is a bear call spread (alternatively call credit spread). If constructed using puts, it is a bear put spread (alternatively put debit spread).

Bear call spread

A bear call spread is a limited profit, limited risk options trading strategy that can be used when the options trader is moderately bearish on the underlying security. It is entered 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 security with the same expiration month.

Example

Consider a stock that costs $100 per share, with a

with a

strike price In finance, the strike price (or exercise price) of an option is a fixed price at which the owner of the option can buy (in the case of a call), or sell (in the case of a put), the underlying security or commodity. The strike price may be set b ...

of $105 for $2 and a call option with a strike price of $95 for $7. To implement a bear call spread, one * buys the $105 call option, paying a premium of $2, and * sells the $95 call option, making a premium of $7. The total profit after this initial options trading phase will be $5. After the options reach

expiration Expiration or expiration date may refer to: Expiration Expiration may refer to: *Death *Exhalation of breath, breathing out *Expiration (options), the legal termination of an option to take an action *Shelf life, or the time after which a product ...

, the options may be exercised. If the stock price ends at a price (P) below or equal to $95, neither option will be exercised and your total profit will be the $5 per share from the initial options trade. If the stock price ends at a price (P) above or equal to $105, both options will be exercised and your total profit per is equal to the sum of $5 from the original options trading, a loss of (P - $95) from the sold option, and a gain of (P - $105) from the bought option. Total profits will be ($5 - (P - $95) + (P - $105)) = -$5 per share (i.e. a loss of $5 per share). The loss is due to speculation that the price would go down but it actually did not.

Bear put spread

A bear put spread is a limited profit, limited risk options trading strategy that can be used when the options trader is moderately bearish on the underlying security. It is entered 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 drops, maximizing his profit when the underlying 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.

References

External links

Not All Call Buying is Bullish
OptionsZone.com {{Derivatives market Options (finance) Derivatives (finance)

Bear call spread

Example

Bear put spread

See also

References

External links