In bearish market a trader employing bearish option strategies hopes that the securities in question will depreciate. Traders should analyze how the price of the security will move and the time in which the decline will occur. This analysis is particularly beneficial in selecting the optimum trading strategy.
When the outlook of a given stock is bearish, it means that it will fall in price, traders will, therefore, want to apply the best trading strategy. More beginner traders believe that buying call options is the best way to generate profit. This may not always be the case. Buying puts might not be the brightest idea if the trader expects a small reduction in the prices. This is because buying calls does not offer protection if the price of that stock does not change or goes up.
Numerous strategies can be employed to overcome such problems while also providing other benefits. Some of the most commonly used bearish options strategies include:
Bear Put Spread
This bearish spread is quite simple and suitable for beginners that expect the price of securities to drop by a moderate amount. It involves two transactions that are combined to form a debit spread. This bearish put strategy offers an advantage by reducing costs of putting a long put and short put position. This move can limit the trader’s earning potential but can influence how much the dealer can make from the debit spread.
Since the spread reduces costs, traders can make significant earnings from investment and also decrease the amount of investment that the trader can lose. The fact the strategy is quite simple is also an added advantage.Here's an article that explains more about the bear put spread: Bear Put Spread
Bear Call Spread
The bear call spread requires two transactions. It is not suitable for beginners since it is an advanced strategy that would require a high trading level. It is mostly employed to earn profit when the stock falls in price. Moreover, it is best when the expected drop is small. The bear call credit spread can be a viable alternative to the short call. However, the potential earnings and losses are quite limited.
The main advantage of the bear call credit spread strategy is the level of flexibility it provides. Traders can employ it so that they make a profit when the price remains the same or when the prices fall making a greater profit. Secondly, the maximum losses are limited. Lastly, the strategy is simple with only two transactions required, so the commissions are lower than other strategies.
For a Bear Call Spread Example, you can visit this link: Bear Call Spread Example
Bear Ratio Spread
The bear put ratio spread is an advanced version of the bear put spread. It is employed by traders so as to make profits on the fall of the price of a commodity. However, it is more sophisticated and comes with better flexibility. This strategy can be utilized to reduce the upfront costs and increase the potential profits if the stock in question falls to a particular price.Additionally, traders can use this strategy to benefit even if the security does not fall in price, or even if it increases a little. This plan is complex with numerous determining factors hence it is not suitable for beginners.
The flexibility of this method is of great advantage. Traders can use it in the way that best suits their needs.
Short Bear Ratio Spread
This plan is advanced. It is used to generate earnings from the value of a stock falling. The strategy offers a high return on investment if a security depreciates in price at the same time allowing the trader to reduce the amount of capital needed.
It requires two transactions. However, it is not a simple plan. The greatest advantage of this method is that traders can make unlimited profits if the price of the security falls, but if the prices increase, the losses are limited.
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