What is a ‘Bear Spread’
A bear spread is an option strategy that will profit when the price of the underlying security declines. The strategy involves the simultaneous purchase and sale of options, where either puts or calls can be used. A trader buying a put bear spread would purchase a put with a higher strike price while simultaneously selling a put with a lower strike price. Likewise, a trader can sell a call with a higher strike price and buy a call with a lower strike price.The options will often have the same expiration date. A bear spread is sometimes called a bear vertical spread, and is in contrast to a bull vertical spread.
Bear spreads can also involve ratios, such as buying one put to sell two or more puts at a lower strike price than the first. Because it is a spread strategy that pays off when the underlying declines, it will lose if the market rises – however, the loss will be capped at the premium paid for the spread.
BREAKING DOWN ‘Bear Spread’
A bear spread is also a trading strategy used by futures traders who intend to profit from the decline in commodity prices while limiting potentially damaging losses. In an options bear spread,…