Strategies in Trading Options Contracts (Part 3)

Besides the Bull Spreads strategy, there is a strategy that also helps investors receive stable profits and limit losses to a controllable level, which is the Bear Spreads strategy.

Bear Spreads Strategy

This strategy is implemented by simultaneously buying and selling options with different strike prices at different prices of the same underlying asset and with the same expiration date.

This strategy comes in two forms, including:

Bear Spreads Strategy with Call Options: With this strategy, the investor sells a call option with a certain strike price and simultaneously buys a call option with a higher strike price.

Bear Spreads Strategy with Put Options: With this strategy, the investor sells a put option with a certain strike price and simultaneously buys a put option with a higher strike price.

Thus, in contrast to the Bull Spreads strategy, the Bear Spreads strategy is suitable for investors who expect to receive stable profits when the underlying asset price falls and limit losses to a certain level when the underlying asset price rises.

For example:

An investor executes a Bear Spread strategy with call options. The investor simultaneously sells a December 2024 wheat call option with a strike price of 720 cents/bushel for a premium of 64 cents/bushel and buys a call option with a strike price of 820 cents/bushel for a premium of 34 cents/bushel.

The profit from the Bear Spreads strategy depends on the price of the December 2024 wheat contract (ZWAZ24) in the future. The following cases may occur:

Case 1: ZWAZ24 contract price increases above 820 cents/bushel

If the price of the ZWAZ24 futures contract exceeds 820 cents/bushel, both calls are exercised. The investor incurs a loss (excluding transaction costs and other taxes/fees) calculated as the Difference between the two options' strike prices - the difference between the premiums, or (820 – 720) – (64 – 34) = 70 cents/bushel.

Case 2: ZWAZ24 contract price falls below 720 cents/bushel

If the ZWAZ24 futures contract price falls below 720 cents/bushel, both calls are not exercised. The investor now receives a profit equal to the difference in premium, i.e. (64 – 34) = 30 cents/bushel.

Case 3: ZWAZ24 contract price is in the range of 720 – 820 cents/bushel

If the price of the ZWAZ24 futures contract is between 720 and 820 cents/bushel, say 760 cents/bushel. Then only the ZWAZ24 call option with a strike price of 720 cents/bushel will be exercised. The investor must buy one ZWAZ24 contract at 790 cents/bushel to fulfill the obligation and incur a loss (excluding transaction costs and other taxes/fees) of (760 – 720) - (64 – 34) = 10 cents/bushel. The investor's loss in this case will not exceed the investor's loss in case 1, and the investor's profit will not exceed the investor's profit in case 2.

Source: https://congthuong.vn/hoi-dap-giao-dich-hang-hoa-so-68-cac-chien-luoc-trong-giao-dich-hop-dong-quyen-chon-phan-3-328091.html