Understand the bear call spread and bear put spread strategies

by Pankhudi Dave Head Finance Manager
A bear call spread is a two-legged options trading strategy applied when one's market outlook is relatively bearish. Using this practice, an investor sells a call option while concurrently buying a different call option with the same underlying resource and expiration date but at a higher strike price.

Hence, one makes a net profit by earning a higher option premium on the call sold than the amount charged for the call purchased. Because this technique is used by options traders to produce incentives with a bearish view of an output of the asset, it is called 'bear call spread'. Nevertheless, when one initiates a bear call spread strategy, they earn their premium forthright.

Now that we know what it means, here are some situations where its strategies could prove helpful:

  • Unless the investor expects a small fall rather than a significant drop in the results of a stock or index, a bear call spread strategy is perfect. That is because the future benefits from a relatively small downturn are smaller and are limited to one's option premiums. If the decline were more severe, the possible benefits would be higher. Hence, it would be more fitting to introduce a bear put spread, short selling, or purchasing puts as trading strategies.

  • Even even if the long and short legs of the bear call spread aim to balance the shock value of uncertainty, this strategy pays off better when the market is unpredictable. This is because when indicated volatility is high, one may produce more income from premiums.

Bear put spread

The bear put spread. If you are unaware of what it means, it is one of the common tactics in options trading when a bearish investor wants to maximise gains while keeping losses at a minimum. It is a tactic that comes in handy for a bearish market, where an investor is speculating that the price of a commodity is going down.

For a thorough understanding of bear put spread strategy, one must first consider options and the two forms involved: put and call. A put option lets the owner sell the asset underlying at the strike price in the contract until the date when it expires. At the other hand, a call option enables the owner to buy the asset underlying at the strike price in the contract, till the day it expires.

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About Pankhudi Dave Freshman   Head Finance Manager

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Joined APSense since, July 2nd, 2019, From Mumbai, India.

Created on Aug 10th 2020 13:18. Viewed 145 times.


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