Earn Money From Declining Prices With Bear Put Spreads
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 indicates 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 costs till option expiry date for it to be moneymaking. Except for a debit spread you'd ideally need it to penetrate thru both strike costs for max 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 at the same time selling the matching number of put options at an exercise price which is below the acquired options. As the purchased options will be more highly priced ( being closer to the money ) compared against the sold ones, the net result's a debit to your trading account - thus, the "debit spread" part of the trade.
Since we enter put debit spreads on the presumption that we will be able to make important gain if the essential price falls, they supply a way of entering a greater number of option positions at less cost than simply buying ( going long ) puts. They also permit larger overall flexibility should the fundamental price briefly move against us, for the fact that we'd consider buying the 'sold ' position for a little part of what we sold it, on the proposition that if the stock return to its falling trend, we may profit from the leftover purchased put option, which we now own at a giant discount.
Bear Put Spreads must be distinguished from bear call spreads. The latter are credit spreads, again the results of a bearish view of the market but made from call options ( not put options ) but counting on the basic stock to stay away from their strike costs.
Article Source: FxTradingStock.com
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by: John Luther
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Date: Sun, 27 Feb 2011
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