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Bear Spreads

Discuss Bear Spreads within the Financial Management ( FM ) forums, part of the Resolve Your Query - Get Help and discuss Projects category; Bear Spreads In contrast to the bull spreads, bear spreads are used as a strategy when one is bearish of ...

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Sunanda K. Chavan
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Bear Spreads - October 8th, 2010

Bear Spreads

In contrast to the bull spreads, bear spreads are used as a strategy when one is bearish of the market, believing that it is more likely to go down than up.

Like a bull spread, a bear spread may be created by buying a call with one exercise price and selling another one with a different exercise price. Unlike in a bull spread, however, the exercise price of the call option purchased is higher than that of the call option sold. A bear spread would involve an initial cash inflow since the premium for the call sold would be greater than for the call bought.

Assuming that the exercise prices are E1 and E2 with E1 < E2, the payoffs realizable from a bear spread in different circumstances are given in the table below.

Suppose that the exercise prices of two call options are Rs. 50 and Rs. 60. If the stock price, S1, were lower than Rs. 50, then none of the calls will be exercised and, therefore, no payoffs are involved. If the price were between the two exercise prices, say Rs. 57, then the call written for Rs. 50 would be exercised and the investor loses Rs. 7, and if the price of the stock exceeded Rs. 60, both the calls would be exercised and an outward payoff of Rs. 10 would result. In each of the cases, the net profit would be obtained by
Bear spreads can also be created by using put options instead of call options.

In such a case, the investor buys a put with a high exercise price and sells one with a low exercise price. This would require an initial investment because the premium for the put with a higher exercise price would be greater than the premium receivable for the put with the lower exercise price, written by the investor. In this spread, the investor buys a put with a certain exercise price and chooses to give up some of the profit potential by selling a put with a lower exercise price. In return for the profit given up, the investor gets the price of the option sold.

The payoffs from a bear spread created with put options are given in the table below, wherein E1 and E2 are the exercise prices of the option sold and purchased respectively. The profit function is given in figure below. It may be observed that, like bull spreads, bear spread limit both the upside profit potential and the downside risk.
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Rose Marry
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Re: Bear Spreads - April 15th, 2016

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Originally Posted by sunandaC View Post
Bear Spreads

In contrast to the bull spreads, bear spreads are used as a strategy when one is bearish of the market, believing that it is more likely to go down than up.

Like a bull spread, a bear spread may be created by buying a call with one exercise price and selling another one with a different exercise price. Unlike in a bull spread, however, the exercise price of the call option purchased is higher than that of the call option sold. A bear spread would involve an initial cash inflow since the premium for the call sold would be greater than for the call bought.

Assuming that the exercise prices are E1 and E2 with E1 < E2, the payoffs realizable from a bear spread in different circumstances are given in the table below.

Suppose that the exercise prices of two call options are Rs. 50 and Rs. 60. If the stock price, S1, were lower than Rs. 50, then none of the calls will be exercised and, therefore, no payoffs are involved. If the price were between the two exercise prices, say Rs. 57, then the call written for Rs. 50 would be exercised and the investor loses Rs. 7, and if the price of the stock exceeded Rs. 60, both the calls would be exercised and an outward payoff of Rs. 10 would result. In each of the cases, the net profit would be obtained by
Bear spreads can also be created by using put options instead of call options.

In such a case, the investor buys a put with a high exercise price and sells one with a low exercise price. This would require an initial investment because the premium for the put with a higher exercise price would be greater than the premium receivable for the put with the lower exercise price, written by the investor. In this spread, the investor buys a put with a certain exercise price and chooses to give up some of the profit potential by selling a put with a lower exercise price. In return for the profit given up, the investor gets the price of the option sold.

The payoffs from a bear spread created with put options are given in the table below, wherein E1 and E2 are the exercise prices of the option sold and purchased respectively. The profit function is given in figure below. It may be observed that, like bull spreads, bear spread limit both the upside profit potential and the downside risk.
hey friend nice post!,

Please check attachment for Trading strategy on Bear Spread, so please download and check it.
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