A bear call spread and a bear put spread are both options strategies used when you expect the price of the underlying asset to decline or remain below a certain level.
Bear Call Spread
- Setup: A bear call spread involves selling a call option and simultaneously buying another call option with a higher strike price, both having the same expiration date.
- Objective: This strategy profits when the price of the underlying asset stays below the strike price of the sold call.
- Risk/Reward: The risk is limited to the difference between the two strike prices minus the net premium received for the trade. The maximum profit is the net premium received from the sale of the call spread.
- Ideal Scenario: You expect the underlying asset's price to decrease or remain below the strike price of the sold call option.
Example:
- Sell a call option with a strike price of $50,
- Buy a call option with a strike price of $55,
- Both options expire in a month.
If the price remains below 55, your losses start to grow.
Bear Put Spread
- Setup: A bear put spread involves buying a put option and selling another put option with a lower strike price, both with the same expiration date.
- Objective: This strategy profits when the price of the underlying asset falls below the strike price of the bought put.
- Risk/Reward: The risk is limited to the net premium paid for the spread. The maximum reward is the difference between the two strike prices minus the net premium paid.
- Ideal Scenario: You expect the underlying asset's price to fall.
Example:
- Buy a put option with a strike price of $50,
- Sell a put option with a strike price of 45, you maximize your profit. If it stays above $50, you lose the premium paid.
Both strategies have limited risk and limited reward, making them useful in volatile or slightly bearish market conditions.