InvestorQ : How do you options if you expect markets to go down but feel downsides are limited?
Nishant Chandani made post

How do you options if you expect markets to go down but feel downsides are limited?

Answer
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Abhi Yadav answered.
2 years ago


You are bearish on the Nifty but you also believe that the valuations of Nifty stocks are just too compelling. Therefore any sharp correction, according to your view is largely ruled out. Let us say, the Nifty will not correct from 9800 to 9200 but only till 9600. How do you play this moderately bearish view on the market? You can create a bear put spread on the Nifty. So you buy a Nifty put option of 9800 strike and sell the Nifty put of 9600 strike. The premium you receive on selling the 9600 put partially compensates for the premium you pay on the 9800 put. Your maximum loss is not the premium paid on the 9800 put but your net premium paid (premium paid on 9800 minus premium received on the 9600 put). A bear put strategy works perfectly when you are moderately bearish on the markets and yet want to play it using options. Remember, options unlike futures are not binary. That means it just not result in loss or profit. You can create parabolic alternatives using options and the bear put spread is a case in point.