24 lines
1.5 KiB
Plaintext
24 lines
1.5 KiB
Plaintext
Bear Put Spread
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There is another way to take a bearish stance with vertical spreads: the bear
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put spread. A bear put spread is a long put plus a short put that has a lower
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strike price. Both puts are on the same underlying and share the same
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expiration month. This spread, however, is a debit spread because the more
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expensive option is being purchased.
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Imagine that a stock has had a good run-up in price. The chart shows a
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steady march higher over the past couple of months. A study of technical
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analysis, though, shows that the run-up may be pausing for breath. An
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oscillator, such as slow stochastics, in combination with the relative
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strength index (RSI), indicates that the stock is overbought. At the same
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time, the average directional movement index (ADX) confirms that the
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uptrend is slowing.
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For traders looking for a small pullback, a bear put spread can be an
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excellent strategy. The goal is to see the stock drift down to the short strike.
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So, like the other members of the vertical spread family, strike selection is
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important.
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Let’s look at an example of ExxonMobil (XOM). After the stock has
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rallied over a two-month period to $80.55, a trader believes there will be a
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short-term temporary pullback to $75. Instead of buying the June 80 puts
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for 1.75, the trader can buy the 75–80 put spread of the same month for
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1.30 because the 75 put can be sold for 0.45. 1
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In this example, the June put has 40 days until expiration. Exhibit 9.7
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illustrates the payout at expiration. |