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Bearish Strategies


Bearish Strategies

Sell Call / Short Call

When you buy a Call you are hoping that the underlying stock / index would rise. When you expect the underlying stock / index to fall you do the opposite. When an investor is very bearish about a stock / index and expects the prices to fall, he can sell Call Options. This position offers limited profit potential and the possibility of large losses on big advances in underlying prices. Although easy to execute it is a risky strategy since the seller of the Call is exposed to unlimited risk.

Market Scenario : Bearish || Risk : Unlimited || Reward : limited || BEP : Call Strike + Premium

Example...

Spot Price 5100

Strategy Strike Price Premium
Short Call 5000 150

BEP = 5000 + 150 = 5150

On exit if....

Spot Price Call Payoff Premium Strategy Payoff
4800 0 150 150
4900 0 150 150
5000 0 150 150
5100 -100 150 -50
5150 -150 150 0
5200 -200 150 0
5300 -300 150 -150
5400 -400 150 -250
5500 -500 150 -450


How To Trade Short Call Options:


Buy Put / Long Put

Buying a Put is the opposite of buying a Call. When you buy a Call you are bullish about the stock / index. When an investor is bearish, he can buy a Put Option. A Put Option gives the buyer of the Put a right to sell the stock (to the Put seller) at a pre-specified price and thereby limit his risk.

Market Scenario : Bearish Risk : Limited (Premium Paid) || Reward : Unlimited || BEP : Call Strike - Premium

Example...

Spot Price 5100

Strategy Strike Price Premium
Long Put 5000 50

BEP = 5000 - 50 = 4950

On exit if....

Spot Price Put Payoff Premium Strategy Payoff
4700 300 -50 250
4800 200 -50 150
4900 100 -50 50
4950 50 -50 0
5000 0 -50 -50
5100 0 -50 -50
5200 0 -50 -50
5300 0 -50 -50
5400 0 -50 -50
5500 0 -50 -50


How To Trade LongPut Options:



Bear Call Spread

Bear : This Strategy will earn profit when market is bearish and will lose money when market is Bullish.
Call : We will use Call Options to make this Spread.
Spread : pread means combination of Bought and Sold Options. So here we will Buy Calls of one Strike and Sell Calls of another Strike.

So finally Bear Call Spread means the combination of Lower Strike Call Sold and Higher Strike Call Bought so that it will make money when market goes down and will lose money when market goes up.

Market Scenario : Moderately Bearish to Bearish

Risk : Limited || Reward : Limited || BEP : Lower Strike + Net Premium Received

Example...

Spot Price 6000

Strategy Strike Price Premium
Sell Call 6100 100
Buy Call 6200 40

BEP = 6100 + 60 = 6160

On exit if....

Spot Price Buy Put Payoff Sell Put Payoff Strategy Payoff
5800 100 -40 60
5900 100 -40 60
6000 100 -40 60
6100 100 -40 60
6160 40 -40 -0
6200 0 -40 -40
6300 -100 60 -40
6400 -200 160 -40
6500 -300 260 -40



Bear Put Spread

Establishing a bear put spread involves the purchase of a Put Option on a particular underlying stock, while simultaneously writing a Put Option on the same underlying stock with the same expiration month, but with a lower strike price. Both the buy and the sell sides of this spread are opening transactions, and are always the same number of contracts. This spread is sometimes more broadly categorized as a "vertical spread". The bear put spread, as any spread, can be executed as a "package" in one single transaction, not as separate buy and sell transactions.

Market Scenario : Moderately Bearish to Bearish

Risk : Limited || Reward : Limited || BEP : Strike Price of Purchased Put - Net Debit Paid

Example...

Spot Price 5000

Strategy Strike Price Premium
Buy Put 4900 60
Sell Put 4800 30

BEP = 4900 - 30 = 4870

On exit if....

Spot Price Buy Put Payoff Sell Put Payoff Strategy Payoff
4600 240 -170 70
4700 140 -70 70
4800 40 30 70
4870 -30 30 0
4900 -60 30 -30
5000 -60 30 -30
5100 -60 30 -30
5200 -60 30 -30
5300 -60 30 -30
5400 -60 30 -30



Put Ratio Back Spread

As the name Put Ratio Backspread suggests

Put : We will use Put Options to make this Spread
Ratio : The proportion of quantity bought and Quantity sold is there in some Ratio.
Back Spread : When we buy more quantity of one Strike compare to Quantity sold of other strike, it is called Back Spread.

So finally Put Ratio Backspread is the combination of selling one Put of Upper Strike Price and buying double Puts of Lower Strike Price.

Bull Put Spread is having limited loss and limited gain Pay off profile.

Market Scenario : Moderately Bearish to Bearish || Risk: Limited || Reward: Unlimited ||
Upper BEP : Net Premium Received (in case trader has received net Premium otherwise there will not be any Upper BEP)
Lower BEP : (Upper Strike - Lower Strike) + Net Premium Received (incase trader has received net Premium otherwise we will deduct the Net Premium paid amount)

Example...

Spot Price 6000

Strategy Strike Price Premium
Sell Put 6000 120
Buy Put 5900 60
Buy Put 5900 60

BEP = 5900 - (6000 - 5900) +0 = 5800

On exit if...

Spot Price Sell Put Payoff Buy Double Put Payoff Strategy Payoff
5500 -380 680 300
5600 -280 480 200
5700 -180 280 100
5800 -80 80 0
5900 20 -120 -100
6000 120 -120 0
6100 120 -120 0
6200 120 -120 0
6300 120 -120 0







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