Bear 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.

Bear Spread

In options, the purchase and sale of a series of contracts designed to make a profit for an investor as the price of the underlying asset declines. One buys and writes these options at different strike prices; however it is important to note that all contracts have the same expiration date. The investor makes a profit if the price of the underlying declines.

2. In futures, the sale of a contract expiring in a near month and the purchase of a contract in the same or a similar underlying asset expiring in a later month. In this situation, the investor makes a profit if the price of the underlying declines.

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.

Bear spread.

A bear spread is an options strategy that you use when you anticipate a decline in the price of the underlying instrument, such as a stock or an index.

As in any spread, you purchase one option and write another on the same underlying item. Both options are identical except for one element, such as the strike price or the expiration date.

For example, with a vertical bear call spread, you buy a call with a higher strike price and sell a call with a lower strike price. With a vertical bear put, you buy a put at a higher price and sell a put at a lower price.

In either case, if you're right about the behavior of the underlying instrument -- for example, if a stock whose price you expect to fall does lose value -- you could have a net profit. If you're wrong, you could have a net loss cushioned by the income from the sale of one of the legs of the spread.

References in periodicals archive ?
Investors with a negative view of a particular stock or the overall market can use a bear spread -- the simultaneous purchase and sale of options that expire on the same date -- to reduce downside risk, while limiting upside potential.
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OI offers daily commentary, thorough analysis, and market-beating performance in covered-calls, naked-puts, bull & bear spreads, straddles, strangles, and volatility positions.
OI is proud of their outstanding performance in every one of these categories: Covered-Calls, Naked-Puts, Bull & Bear Spreads, Straddles, Strangles and Volatility Positions.