What’s the difference between bear put spreads and bear call spreads, for instance? Do you actually see why they’re each called by that name? This is all about knowing why our option dealing terms are what they are. Here’s how it operates. The 1st word in the expression indicates your view about the market. So a bear put spread would suggest that you suspect the base stock under consideration is preparing to experience a price dive. To put it in another way, you are bearish regarding the stock, that means your vertical spread methodology will exhibit that.
The subsequent part of the expression suggests not only the sort of spread you intend to do, but when mixed with the bearish nature of your outlook for the stock, shows that it’s going to be a debit spread ( not a credit spread ). Had you been doing a credit spread, you would need the underlying to stay away from the spread strike prices till option expiry date in order for it to be moneymaking. But for a debit spread you’d ideally need it to penetrate thru both strike costs for optimum profit.
Bear put spreads are option debit spreads that are set up by purchasing put options having a strike ( exercise ) price which is close to the current market cost of the share … And simultaneously selling the matching number of put options at an exercise price which is below the purchased options. As the purchased options will be more high priced ( being closer to the cash ) matched against the sold ones, the net result’s a debit to your trade account – therefore, the “debit spread” part of the trade.
Since we enter put debit spreads on the grounds that we will be able to make significant gain if the essential price falls, they offer a strategy of entering a bigger number of option positions at less cost than simply purchasing ( going long ) puts. They also permit larger overall pliability if the underlying price temporarily move against us, for the fact that we’d consider repurchasing the ‘sold ‘ position for a fragment of what we sold it, on the proposition that if the stock return to its declining trend, we intend to profit from the leftover purchased put option, which we now own at a giant discount.
Bear Put Spreads have to be distinguished from bear call spreads. The second are credit spreads, again the results of a bearish view of the market but made from call options ( not put options ) but depending on the base stock to stay away from their strike costs.