InvestorQ : Is there a way I can play the market with options when moderately bearish?
sara Kunju made post

Is there a way I can play the market with options when moderately bearish?

Answer
user profile image
Riya Dwivedi answered.
2 years ago


You play a bull call spread when you are moderately bullish. Similarly, you can play a bear put spread when you are moderately bearish. In a bear put spread, you buy a higher strike put option and sell a lower strike put option of the same stock or same index for the same expiry. You normally use this strategy when you are moderately bearish. Check the payoff table below.

Buy RIL Dec 1180 put at Rs.33 and Sell RIL Dec 1120 call at Rs.13

Long Put Strike

RIL CMP

Difference

ITM/OTM

Profit/Loss

Option Premium

P/L on Long Put

Short Put Strike

RIL CMP

Difference

ITM/OTM

Profit/Loss

Option Premium

P/L on Long Call

Net Profit

1180

900

280

ITM

280

-33

247

1120

900

-220

ITM

-220

13

-207

40

1180

920

260

ITM

260

-33

227

1120

920

-200

ITM

-200

13

-187

40

1180

940

240

ITM

240

-33

207

1120

940

-180

ITM

-180

13

-167

40

1180

960

220

ITM

220

-33

187

1120

960

-160

ITM

-160

13

-147

40

1180

980

200

ITM

200

-33

167

1120

980

-140

ITM

-140

13

-127

40

1180

1000

180

ITM

180

-33

147

1120

1000

-120

ITM

-120

13

-107

40

1180

1020

160

ITM

160

-33

127

1120

1020

-100

ITM

-100

13

-87

40

1180

1040

140

ITM

140

-33

107

1120

1040

-80

ITM

-80

13

-67

40

1180

1060

120

ITM

120

-33

87

1120

1060

-60

ITM

-60

13

-47

40

1180

1080

100

ITM

100

-33

67

1120

1080

-40

ITM

-40

13

-27

40

1180

1100

80

ITM

80

-33

47

1120

1100

-20

ITM

-20

13

-7

40

1180

1120

60

ITM

60

-33

27

1120

1120

0

ATM

0

13

13

40

1180

1140

40

ITM

40

-33

7

1120

1140

20

OTM

0

13

13

20

1180

1160

20

ITM

20

-33

-13

1120

1160

40

OTM

0

13

13

0

1180

1180

0

ATM

0

-33

-33

1120

1180

60

OTM

0

13

13

-20

1180

1200

-20

OTM

0

-33

-33

1120

1200

80

OTM

0

13

13

-20

1180

1220

-40

OTM

0

-33

-33

1120

1220

100

OTM

0

13

13

-20

1180

1240

-60

OTM

0

-33

-33

1120

1240

120

OTM

0

13

13

-20

1180

1260

-80

OTM

0

-33

-33

1120

1260

140

OTM

0

13

13

-20

1180

1280

-100

OTM

0

-33

-33

1120

1280

160

OTM

0

13

13

-20

1180

1300

-120

OTM

0

-33

-33

1120

1300

180

OTM

0

13

13

-20

1180

1320

-140

OTM

0

-33

-33

1120

1320

200

OTM

0

13

13

-20

1180

1340

-160

OTM

0

-33

-33

1120

1340

220

OTM

0

13

13

-20

1180

1360

-180

OTM

0

-33

-33

1120

1360

240

OTM

0

13

13

-20

1180

1380

-200

OTM

0

-33

-33

1120

1380

260

OTM

0

13

13

-20

1180

1400

-220

OTM

0

-33

-33

1120

1400

280

OTM

0

13

13

-20

1180

1420

-240

OTM

0

-33

-33

1120

1420

300

OTM

0

13

13

-20

1180

1440

-260

OTM

0

-33

-33

1120

1440

320

OTM

0

13

13

-20

In a bear put spread there are two distinct positions. You are buying RIL Dec 1180 put at Rs.33 and simultaneously selling Rs.1120 put at Rs.13. Effectively, your net cost of the strategy is Rs.20 (33 – 13). This will be your maximum loss as you can see in the table above. At no point does the maximum loss exceed Rs.20. On the profit side your maximum profit will be earned at the strike of Rs.1120 where you have sold the put. Beyond that point, whatever you earn on the 1180 put you will lose on the 1120 put which you have sold. The breakeven point is the lower strike of 1180 minus the net cost of Rs.20 which is Rs.1160 where you will see that the profits are zero. This strategy should ideally be used only when you are moderately bearish so that you can reduce your cost of buying a put option by selling a lower put option. As you can see in the table above, below Rs.1120, your profits peak out at Rs.40, which is where it will continue in the future too as you go lower on the price chart.