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What is a Bear Spread?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 03 November 2016
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    Conjecture Corporation
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Bear spreads are a type of option strategy that are employed with a vertical approach that involves such factors as deferred month futures contract and a drop in security price. A bear spread may employ the use of either put options or call options in order to crate the ideal option strategy. Here are a couple of examples of how the bear spread works.

When a bear spread makes use of call options, the process is sometimes referred to as a bear call spread. The basic idea is to buy call options at a particular strike price, while selling the same number of call options at a strike price that is lower than the price for the newer purchases. For example, a given stock has a current stock quote of $200.00 US Dollars (USD). The current strike price for this amount is $2 USD. At the same time, stock that is in the possession of the investor has a current quote of $205 USD with a call option of $5 USD. The investor chooses to purchase the call option on the $200 USD stock, which creates an outflow of $200 USD. At the same time, the investor chooses to sell the call option, which creates a gross inflow of $500 USD. After allowing for the outflow, this means the investor has gained $300 USD.

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The bear spread approach that makes use of the call put approach is somewhat similar. With this strategy, the focus is on using puts rather than calls to achieve an increase in net worth. The investor will buy put options that currently have a higher strike price, while selling the same number of stocks that have a lower current put price that have the same expiration month as the stocks that were sold. In this scenario, the hope is that the pricing of the underlying stock will drop during the period cited. If this happens, the amount of profit that is made from the set of transactions will be maximized, with no real need to make any deferments in the futures contract to achieve the increase.

The bear spread is a workable investment strategy in many instances. However, it is also an approach that requires attention to detail. The chances of making a misstep in the process are very good, especially for persons who are just beginning to work with stock options. As with any type of investment strategy, it is a good idea to run some simulations before actually engaging in a bear spread.

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anon31350
Post 1

How do the investors choose between call bear and put bear spreads? I mean why would someone opt to go for a put bear which requires initial cash outflow rather than going for a call with positive CF? After all, they both expect fall in stock price.

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