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This is a second blog of the series explaining Bearish including Buy Put, Sell Call, Bear Call Spread, Bear Put Spread and Put Ratio Back Spread and other two categories. Before moving forward make sure to check the previous blog of the series for Introduction to Option Trading Strategies and Bullish Option Trading Strategies.
Bearish Option Trading Strategies
a) Bear Put Spread
A bear put spread includes buying and selling puts for much the same underlying value with about the same termination date but different strike prices at the same time. The gap between both the strike prices minus the net cost of the spread, including commissions, is the maximum profit that may be made. The maximum liability is equivalent to the spread’s cost plus commissions. Your risk is limited to the premium difference, while your reward is confined to the gap in Put Option strike prices less net premiums.
b) Bear Call Spread
When the market is bearish, a two-leg option strategy called a Bear Call Spread is used. One shorter call with a significantly lower price and one long call with a slightly higher level make up a bear call spread. In comparison to purchasing or writing a call, the bear call spread allows premium income to be produced with a reduced level of risk. When a trader feels the price of the underlying asset will fall moderately, this approach is applied.
c) Put Ratio Back Spread
The Put Ratio back spread accepts that the trader uses it when he is pessimistic on the market or a particular company. You profit regardless of whether the market moves up or down; however, the technique is more profitable if the market falls. Depending on how it is built, a put ratio spread might have an unlimited potential profit with a restricted loss, or a restricted potential profit with the possibility of an endless loss.
Neutral Option Trading Strategies
a) Iron Butterfly
Selling both a call and a put option with almost the same strike price and time frame is a major principle behind this option strategy. One short call and one short put make up the short straddle. The amount of profit that can be made is restricted to the total amounts received minus commissions. A short straddle profiteers from the asset’s price’s underlying lack of volatility.
b) Iron Butterfly
Simultaneous operation of a short put spread and a short call spread. Spreads converge at the strike price. An iron butterfly is a technique that uses four distinct contracts to profit from stocks or futures prices moving inside a set range. Investors must be mindful that their trade may result in a trader purchasing the stock after it has expired.
c) Short Strangle
A short call with a higher strike price and one short put with a lower strike price make up a short strangle. If the options are assigned, a short strangle provides you with the duty to buy the stock at a specific price and the obligation to sell the shares at a different price. When the trader believes the underlying stock to have very minimal volatility in the short term, this method can be applied. It is a strategy with restricted profit potential and unlimited risk potential.
d) Short Iron Condor
The Options Strategy mixes put and call vertical spreads to provide investors with more flexibility when trading options. On the same underlying stock, it combines a bullish and bearish vertical spread and thus justifying its “Neutral Behavior”. The potential profit is limited to the premium received, similarly, the potential loss is also limited.
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