What is a Bear Spread?
A bear spread is a combination of call options designed to profit from a rise in the price of the underlying security. The “bear” means that we are looking to profit from a decline in prices, whereas the spread is showing that we are spreading our risk among various option positions. When an investor enters into a bear spread they will purchase one call option whose strike price is above that of the underlying, while simultaneously selling an option with a strike price lower than that of the underlying. In other words, if a stock is trading at $100, then the option strategist could sell a XYZ November 95 call, while simultaneously buying an XYZ November 105 call. Here the option investor wants to profit from a fall in the stock price, but also hedge to prevent any sort of nasty draw down due to the stock taking off. This is accomplished by buying the out of the money call option for protection against a rise in prices, while selling the in the money option to capitalize on the anticipa
Bear spreads are a type of option strategy that are employed with a vertical approach that involves such factors as deferred month futures contract and a drop in security price. A bear spread may employ the use of either put options or call options in order to crate the ideal option strategy. Here are a couple of examples of how the bear spread works. When a bear spread makes use of call options, the process is sometimes referred to as a bear call spread. The basic idea is to buy call options at a particular strike price, while selling the same number of call options at a strike price that is lower than the price for the newer purchases. For example, a given stock has a current stock quote of $200.00 US Dollars (USD). The current strike price for this amount is $2 USD. At the same time, stock that is in the possession of the investor has a current quote of $205 USD with a call option of $5 USD. The investor chooses to purchase the call option on the $200 USD stock, which creates an out
A bear spread is an option combination designed to profit from falling stock prices. You can use a bear spread with call options or puts. A bear spread using call options requires two call options on the same stock with the same expiration date, but with different exercise prices. You sell the call option with the lower exercise price and buy the call option with the higher exercise price, with the intention of netting a profit on the premium spread (the premium on the lower exercise price call is greater than the premium on the higher exercise price call). As the market price declines, neither option is exercised. If the market price rises, you have established a ceiling for potential loss should the options be exercised. A bear spread with puts works the same as a bull spread with calls. You buy a put with a higher exercise price and sell a put with a lower exercise price (as stock prices fall, the put with the higher exercise price will be in-the-money first). Both puts are on the s
