Bear spread
Encyclopedia
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 option
s or call option
s. If constructed using calls, it is a bear call spread. If constructed using puts, it is a bear put spread.
with a strike price
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
, 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.
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...
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 option
Put option
A put or put option is a contract between two parties to exchange an asset, the underlying, at a specified price, the strike, by a predetermined date, the expiry or maturity...
s or call option
Call option
A call option, often simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this type of option. The buyer of the call option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument from the seller...
s. If constructed using calls, it is a bear call spread. If constructed using puts, it is a bear put 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 call optionCall option
A call option, often simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this type of option. The buyer of the call option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument from the seller...
with a strike price
Strike price
In options, the strike price is a key variable in a derivatives contract between two parties. Where the contract requires delivery of the underlying instrument, the trade will be at the strike price, regardless of the spot price of the underlying instrument at that time.Formally, the strike...
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 (options)
For an option contract, expiration is the date on which the contract expires. The option holder must elect to exercise the option or allow it to expire worthless.Typically, option contracts expire according to a pre-determined calendar. For instance, for U.S...
, 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.External links
- Not All Call Buying is Bullish, OptionsZone.com