Notices

Bear spread

From Traderpedia

Definition:
An option strategy with maximum profit when the price of the underlying securities decline. In futures, short the nearby future and long the deferred in anticipation of a decline in the general level of prices.


Contents

[edit] Strategy view

Investor thinks that the market will not rise, but wants to cap the risk. Conservative strategy for one who thinks that the market is more likely to fall than rise.

[edit] Implementation

Call option is sold with a strike price of a and another call option bought with a strike of b, producing a net initial credit, OR Put option is sold with a stike of a and another put bought with a strike of b, producing a net initial debit.

[edit] Upside potential

Limited in both cases. Calls: net initial credit. Puts: difference between strikes minus initial debit.

Maximum profit if market at expiry is below the lower strike.

[edit] Downside risk

Limited in both cases. Calls: difference between strikes minus initial credit. Puts: net initial debit.

Maximum loss if at expiry market is above the higher strike.

[edit] Margin

Possibility for margin requirements to be off-set.

[edit] Comment

Time value erosion not too significant due to the balanced position.

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