Bear Spread

Bear Spread Spread (Double Bear Spread, Combination Bear Spread) Strategy Highlights Motivation Profit from a declining stock price. Bearish Outlook Looking for falling stock price. Maximum Gain The maximum gain would occur should the underlying stock be below the lower put strike at expiration. Maximum Loss The maximum loss would occur should the underlying stock be above the upper call strike at expiration. Time Decay The passage of time will, all other things equal, generally have only a slight impact on this strategy. Volatility Impact An increase in implied volatility will, all other thin...

passage of time will, all other things equal, generally have only a slight impact on this strategy. Volatility Impact An increase in implied volatility will, all other things equal, generally have only a slight impact on this strategy. On This Page Description This strategy consists of being short one call and long another call with a higher strike; also long one put and short another put with a lower strike. Typically, the call strikes are above and the put strikes below the current level of underlying stock, and the distance between the call strikes equals the distance between the put strike...

Position (at expiration) Example Long 1 XYZ 70 call Short 1 XYZ 65 call Long 1 XYZ 55 put Short 1 XYZ 50 put MAXIMUM GAIN High put strike - low put strike - net premium paid MAXIMUM LOSS High call strike - low call strike - net premium paid Variations N/A Max Loss The maximum loss would occur should the underlying stock be above the upper call strike at expiration. In that case both calls would be in-the-money, and the loss would be the difference between the call strike prices, plus or minus any premium paid or received from initiating the position. Max Gain The maximum gain would occur shoul...

stock goes below the lower put strike at expiration. The maximum loss occurs when the underlying stock goes above the upper call strike at expiration. Breakeven If this strategy is initiated at even money, then breakeven is anywhere that all the options expire worthless, or between the lower call strike and upper put strike. If a premium was paid or received, then breakeven would occur where the underlying stock at expiration is above the lower call strike price by the premium received or below the upper put by premium paid. Volatility An increase in implied volatility will, all other things e...

while possible at any time, generally occurs for a call when the stock goes ex-dividend and for a put when it goes deep in-the-money. And be aware, a situation where a stock is involved in a restructuring or capitalization event, such as for example a merger, takeover, spin-off or special dividend, could completely upset typical expectations regarding early exercise of options on the stock. Expiration Risk Yes. The investor cannot know for sure whether or not they will be assigned on a short option until the Monday after expiration. If unexpected exercise activity occurs, they could find thems...