22 lines
1.5 KiB
Plaintext
22 lines
1.5 KiB
Plaintext
Bear Spreads
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Using Call Options
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Options are versatile investment vehicles. For every type of bullish position that can
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be established, there is normally a corresponding bearish type of strategy. For every
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neutral strategy, there is an aggressive strategy for the investor with an opposite opin
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ion. One such case has already been explored in some detail; the straddle buy or
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reverse hedge strategy is the opposite side of the spectrum. For many of the strate
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gies to be described from this point on, there is a corresponding strategy designed for
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the strategist with the opposite point of view. In this vein, a bear spread is the oppo
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site of a bull spread.
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THE BEAR SPREAD
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In a call bear spread, one buys a call at a certain striking price and sells a call at a
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lower striking price. This is a vertical spread, as was the bull spread. The bear spread
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tends to be profitable if the underlying stock declines in price. Llke the bull spread,
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it has limited profit and loss potential. However, unlike the bull spread, the bear
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spread is a credit spread when the spread is set up with call options. Since one is sell
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ing the call with the lower strike, and a call at a lower strike always trades at a high
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er price than a call at a higher strike with the same expiration, the bear spread must
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be a credit position. It should be pointed out that most bearish strategies that can be
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established with call options may be more advantageously constructed using put
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options. Many of these same strategies are therefore discussed again in Part III.
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