Bearish Options Strategies are options trading strategies that are designed to profit when a stock goes down.
For stock traders, the only way to
profit when a stock goes down is by shorting the stocks itself. Shorting the stocks itself does not only offers no leverage at all but also
exposes you to unlimited risk should the stock rise instead of fall and also requires a significant margin.
The main component of most Bearish Options Strategies are put options. Put options completely revolutionalized the way traders profit when a stock goes down because there is no need to short anything at all. Traditionally, profiting when a stock goes down only happens when you short the stock itself. Shorting a stock means to "sell" something you do not yet own (through borrowing from your broker actually) and hoping to buy it back when the price drops later, resulting in a profit. This approach is unfavorable in many ways and one of these is the fact that you have to short something (the stock in this case). Having to go short places a margin requirement on your account which actually puts you in debt to the broker and exposes you to unlimited liability of returning the same number of stocks to your broker no matter what the price is in future. This is also why so few stock traders are short sellers. Short selling is simply not as convenient as buying for more retail investors. However, options trading opened up a totally new door as put options are the only financial instrument you can buy that will gain in value when a stock goes down. Yes, put options are contracts that you actually buy to own and then profit when the stock goes down. If the stock goes up instead, the put options simply expire worthless and you lose nothing more than the money paid on those put options. This limited loss potential along with the leverage put options offers is the reason why put options are the backbone of bearish options strategies.
There are two broad categories of Bearish Options Strategies; Debit Strategies and Credit Strategies. Debit Bearish Options Strategies are bearish options strategies which you need to pay cash for. These are Bearish Options Strategies that may have incorporated short options but does not cover the premium paid for the long options entirely. Credit Bearish Options Strategies are Bearish Options Strategies that credits your account with cash when the position is put on. These are Bearish Options Strategies that are made commonly by shorting call options instead of buying put options in order to profit from time decay as well. An example of credit bearish options trading strategy is the Bear Call Spread where Call options are used instead of put options. Credit Bearish Options Strategies certainly increases the odds of winning since it puts time decay in your favor but it limits the maximum options trading profit that can be made.
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One main reason for the development of Bearish Options Strategies is the need to lower capital outlay when buying put options. The lower one pays for a put option position, the higher the ROI one makes from the same move, right? Bearish Options Strategies does that primarily by shorting or writing out of the money put options on top of buying the at the money or in the money put options. As long as the stock does not move lower than the strike price of the out of the money Put options, the premium earned from selling those put options partially offset the higher cost of the at the money or in the money put options, lowering the inital capital outlay of the position. An example of this is the Bear Put Spread.
Bearish Options Strategies are not only capable of producing a profit only when the underlying stock goes down but also when the underlying stock remains stagnant through time decay. Bearish Options Strategies put time decay in your favor through the use of short call options instead of long put options. Short call options profit as long as the underlying stock closes lower than its strike price during expiration but has a limited profit and unlimited risk potential. The most direct example of such a bearish options trading strategy is obviously the Naked Call Write options trading strategy. The problem with such Bearish Options Strategies is the high margin deposit requirement of most options trading brokers and that is why other options are also combined with short call options to produce credit Bearish Options Strategies with lower margin requirements.
Options trading is all about trade-offs. Utilizing Bearish Options Strategies rather than simply buying put options normally limits the maximum profit that you can make when the underlying stock goes down dramatically. This is the price you pay for having all the other benefits that these more complex Bearish Options Strategies grant.
Here is a list of Bearish Options Strategies classified according to their relative complexity in options trading. Complex Bearish Strategies
are usually credit Bearish Options Strategies that require a high account margin.
Basic Bearish Options Strategies:: Buy Put Option / Long Put Option :: Bear Put Spread |
Complex Bearish Strategies:: Naked Call Write / Short Call Option :: Bear Ratio Spread :: Short Ratio Bear Spread :: Bear Call Spread :: Deep ITM Bear Call Spread :: Risk Reversal (Bearish) :: Bear Butterfly Spread :: Long Put Ladder Spread |
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