Advanced Options Strategies
Bearish Options Trading Strategies
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Very Bearish
Strategy View
Investor thinks that the market will fall significantly in the short-term.
.
Strategy Implementation
Put option is bought with a strike price of (a). The more bearish the
investor is, the lower the strike price should be.
Upside Potential
Profit potential is unlimited (well, not really unlimited of course as
the market can not fall below zero).
Break even Point at Expiry
Strike price minus premium paid.
Downside Risk
Limited to the premium paid - incurred if at expiry the market is at or
above the strike (a).
Margin
Not required
Comment
If the market does little then the value of the position will decrease
as the option time value falls.
Certain that market will not rise
Strategy View
Investor is certain that the market will not rise and is unsure/unconcerned
whether it will fall.
Strategy Implementation
Call option is sold with a strike price of (a). If the investor is very
certain of his view then at-the-money options should be sold, if less
certain, then out-of-the-money ones should be sold.
Upside Potential
Limited to the premium received - received if the market at expiry is
at, or below, the option strike.
Downside Risk
Unlimited. Losses on the position will worsen as the market rises. [If
the investor likes the idea of the strategy, but not the downside risk,
they might be interested in a bear spread].
Margin
Required. All strategies involving short option positions require margin
consisting of both the security deposit used for a spot trade plus the
premium received.
Comment
If the market does little, and time passes, this helps as the short position
gains when the time value erodes
Moderately Bearish
Fairly certain that the market will not rise
Strategy View
Investor thinks that the market will not rise, but wants to cap the risk.
Conservative strategy for one who thinks that the market is more likely
to fall than rise.
Strategy Implementation
Call option is sold with a strike price of (a) and another call option
bought with a strike of (b), producing a net initial credit,
OR
Put option is sold with a strike of (a) and another put bought with a
strike of (b), producing a net initial debit.
Upside Potential
Limited in both cases -
Calls: net initial credit
Puts: difference between strikes minus initial debit
Maximum profit if market at expiry is below the lower strike.
Downside Risk
Limited in both cases -
Calls: difference between strikes minus initial credit
Puts: net initial debit
Maximum loss if at expiry market is above the higher strike.
Margin
Required. All strategies involving short option positions require margin
consisting of both the security deposit used for a spot trade plus the
premium received.
Comment
Time value erosion not too significant due to the balanced position.
Bullish in immediate near-term
(weeks)
+ Bearish in longer term (months)
Strategy View
Investor thinks that the market will be flat or rise only slightly in
the short-term, but will then fall later.
Strategy Implementation
Sell a near-dated put option and buy a longer dated out-of-the-money put.
Upside Potential
Large, if the bought option is held after the short option expires (the
position then becomes a straight-forward buy put). If the position is
closed at expiry of the near option, maximum profit will accrue if the
market is at the level of the sold strike.
Downside Risk
Limited to the difference in strikes plus/minus the initial debit/credit
when establishing the spread.
Margin
Required. All strategies involving short option positions require margin
consisting of both the security deposit used for a spot trade plus the
premium received
Hold spot position and Bearish
Strategy View
Investor is long in the spot market and is worried about a market fall.
Put options can be bought to protect the value of the stock position,
while not preventing the position to benefit in the event of a market
rise.
Strategy Implementation
Put options are bought with a strike price of (a). The number of put options
bought will depend on the bearishness of the investor and the size of
the long spot position.
Upside Potential
Profit potential is unlimited, being the ordinary return on the long spot
position minus the fixed premium paid for the put option.
Downside Risk
Potentially limited, (depending on the hedge ratio initially applied).
The gains on the put options - as the market falls - will off-set the
long spot losses.
Margin
Not required
Comment
Strategy characteristics are similar to a buy call.