bear spread

Bear Spread

1. An option strategy seeking maximum profit when the price of the underlying security declines. The strategy involves the simultaneous purchase and sale of options puts or calls can be used. A higher strike price is purchased and a lower strike price is sold. The options should have the same expiration date.

2. A trading strategy used by futures traders who intend to profit from the decline in commodity prices while limiting potentially damaging losses.

Notes:

1. You make money if the underlying goes down and lose if the underlying rises in price.

2. A bear spread is created through the simultaneous purchase and sale of two of the same or closely related futures contracts. This is accomplished in the agricultural commodity markets by selling a future and offsetting it by purchasing a similar contract with an extended delivery date.

See also: Bear, Bull Spread, Bull Vertical Spread, Butterfly Spread, Current Delivery, Delivery, Futures Contract, Option, Spread

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Bear spread

Applies to derivative products. Strategy in the options or futures markets designed to take advantage of a fall in the price of a security or commodity. A bear spread with call options is created by buying a call option with a certain strike price and selling a call option on the same stock with a lower strike price (with the same expiration date). A bear spread with put options is where an investor buys a put with a high strike price and sells a put with a low strike price. With futures, the investor sells the nearby contract and purchases the next out contract. All of these strategies are designed to profit from a fall in the underlying asset's price.

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bear spread

In futures and options trading, a strategy in which one contract is bought and a different contract is sold in such a manner that the person undertaking the spread makes a profit if the price of the underlying asset declines. Two contracts are used in order to limit the size of the potential loss. An example of a bear spread is the purchase of a call option and the simultaneous sale of another call option with a lower strike price and the same expiration date as the option purchased. A fall in the price of the underlying stock will tend to decrease the value of each option. Because the option sold carried a higher price than the option purchased, the investor could expect to make a profit equal to the difference between the two options if a major price decline in the stock should occur. Compare bull spread.