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Although bullish options strategy is the most popular starting point for many investors, there is another approach to options strategy for a different type of market situation. Bearish strategies can also be profitable if use correctly. There is a simple difference between an options strategy that is bullish and one that is bearish; the bullish strategy is employed when the value of an asset is expected to rise, while an investor would use a bearish strategy in the opposite case, when the value is expected to go down. Bearish strategies come in varying forms, just like bullish strategies do.
The put is a simple bearish options strategy that is commonly employed by those just getting into bearish markets. This type of option strategy allows the buyer of the option the right to sell the asset at a pre-determined strike price at any time during the option's duration. There are also spreads that can be used in bearish options strategy; both bear call spreads and bear put spreads.
No matter whether the spread is bullish or bearish, this combination of transactions is called a vertical spread, and can involve both puts and calls in various combinations. The trader purchases more than one option on the same stock, but selects different strike prices and different positions on the trade. In a bearish call spread, the combined transactions are a long call with a high strike price, and a short call with a lower strike price. The bear put spread uses puts, in this case one in a long position with a high price, and one in a short position with a low strike price.
Both bearish and bullish spreads use combinations of long and short calls and puts, but the difference between the two types of option strategy is made obvious in the choice of strike prices for the long and short call or put. In a bullish spread, the low and high strike prices would be reversed.
When investors get started with bearish options strategy, it can be somewhat confusing. There are many types of strategy to consider, but with time they will start to make more sense. Bear spreads, like any other spread, simply require an understanding of how options work.
There are some bear spreads that can limit the amount of profit that an investor can make, but this doesn't mean they aren't worthwhile to pursue. A good mix of options strategy choices is best for any investor.
