Bear Put Spread
A Bear Put Spread is a type of vertical spread strategy used in options trading.
The Bear Put Spread is a vertical spread options strategy implemented when a trader believes the price of an underlying asset will decrease moderately. This strategy involves buying a put option while simultaneously selling another put option with a lower strike price, both having the same expiration date.
How It Works:
1. Buy a Put Option: The trader buys a put option at a specific strike price.
2. Sell a Put Option: Simultaneously, the trader sells another put option with a lower strike price.
Potential Profit and Loss:
- Maximum Profit: Limited to the difference between the two strike prices minus the net premium paid.
- Maximum Loss: Limited to the net premium paid to establish the spread.
Benefits:
- Profit from Declining Prices: The strategy can generate profits if the underlying asset's price decreases.
- Reduced Cost: The premium received from the sold put helps offset the cost of the bought put, reducing the net outlay.
- Defined Risk: The potential maximum loss is predefined, offering a clear risk profile.
Drawbacks:
- Capped Profit Potential: The profit potential is limited to the difference between the strike prices minus the net premium paid.
- Loss on Slight Declines: If the underlying asset's price falls only slightly and lands between the two strike prices at expiration, the strategy could result in a loss.
Example:
Let's consider stock NIFTY currently trading at ₹20000:
1. Buy a ₹19900 put option for a premium of ₹30.25.
2. Sell a ₹19750 put option for a premium of ₹12.80.
Net premium paid: ₹17.45 (₹30.25 - ₹12.80).
If NIFTY declines and lands at ₹19750 or below at expiration, the maximum profit of ₹132.55 is realized (₹150 difference between strikes - ₹17.45 net premium). If NIFTY remains above ₹19750, the maximum loss of ₹17.45 (the net premium paid) is incurred.
In conclusion, a Bear Put Spread is a strategy employed when a trader has a moderately bearish expectation for an asset. It offers a method to potentially profit from a decline in the asset's price, with a clearly defined risk, at a reduced initial cost compared to buying a put outright.
Other Strategies
Iron Condor
A strategy designed to profit from low volatility in the underlying asset, combining a bullish put credit spread and a bearish call credit spread to it.
Iron Butterfly
This is a strategy which profits from low volatility in the price of the underlying asset while minimizing risk.
Short Strangle
A short strangle is a non directional trading strategy where an investor sells an (OTM) call option and put option on the same underlying asset simultaneously.
Short Straddle
A Short straddle is considered neutral or non-directional because it profits from minimal price movement in the underlying asset.
Put Ratio Backspread
The Put Ratio Backspread strategy involves selling and buying put options in a specific ratio.
Bear Call Spread
A Bear Call Spread is an options trading strategy that's used when a trader believes the price of an underlying asset will go down, but not significantly.
Bear Put Spread
A Bear Put Spread is a type of vertical spread strategy used in options trading.
Long Put
Long Put option is the most basic & simplest strategy. It is recommended or implemented when we expect the underlying asset to show significant downside move.
Short Call
Short Call strategy is employed in a bearish or neutral market outlook, where the underlying asset's price is expected to remain stable or fall.
Call Ratio Backspread
The Call Ratio Backspread strategy involves selling and buying call options in a specific ratio.
Bull Put Spread
A Bull Put Spread is a type of vertical spread strategy used in options trading
Bull Call Spread
A Bull Call Spread is an options trading strategy that's used when a trader believes the price of an underlying asset will go up, but not significantly.
Short Put
Short Put strategy is employed in a bullish or neutral market outlook, where the investor believes that the underlying asset's price will remain stable or rise.
Long Call
Long Call option' is the most basic & simplest strategy. It is recommended or implemented when we expect the underlying asset to show significant upside move.
