7 Best Bearish Options Trading Strategies | Motilal Oswal

7 Best Bearish Options Trading Strategies

Trading with futures and options can open a world of opportunity for traders. Options are meant to work very well when markets express bullishness. However, bearish option strategies may function well when a bear market is on. The beauty of trading with options is that options permit traders to work the markets in all directions. Furthermore, you should note that options tend to be non-linear, so it’s possible to blend them with other futures and options, creating helpful hybrid strategies in bearish markets. 

Options in the Markets

When you first open a Demat account to trade and invest, you may not explore futures and options as useful trading systems, but it will be worth your while if you do. For example, in case you think the markets will touch lows, you wouldn’t be too worried about prices falling with options trading. Instead, you may profit from the fall. 

With bearish option strategies, you are apt to be bearish with moderation or bearish with force. Another good thing about options is that you can use these alone or along with futures and options. Combinations such as these are known as hybrid ways to trade. Trading options in markets that display bearishness, expose you to distinct trading measures.  

The Best Bearish Option Strategies

1. The Bear Call Spread

Many investors just brush off options trading strategies as too complicated to delve into and would rather study an upcoming IPO or invest in direct equity. The strategy that involves a bear call spread is about buying and selling a Call Option using a lower strike price with the same underlying asset and the same date of expiry. If you sell a Call Option, you make money by way of a premium. Therefore, your cost of investment is reduced. This is a less risky technique compared to others, as returns are limited only to the difference between the premium received and the premium paid. This is a strategy that is used by a trader who thinks the price of the underlying asset may fall in moderation. 

2. The Bear Put Spread

Here, investors must purchase a higher (in-the-money) put option while selling a lower (out-of-the-money) put option with the same company and the same expiry date. The maximum profit may be achieved when the stock price is at the Short Put (the lower strike) or below this. The method brings a reduced risk factor, but low profit. 

3. The Synthetic Put

Among bearish option strategies, the synthetic put represents a long put option by blending a position of a short stock plus a long call option with the same stock, commonly termed the “long synthetic put”. For example, an investor may be short a stock, so they buy a call option, at the money, on the same stock. Such action is taken in order to protect stock prices from rising. The most you risk is limited to the strike price. The profit, here, tends to be limitless. 

4. The Strip Strategy

This is a strategy that displays a bearish bias and is used most effectively in markets with volatility. The approach of the strategy is one of “net debit”, slightly modified out of the Long Straddle approach. With a small tweak, you go long on the Put and one additional lot, so you get a bearish bias. The profit here, too, can be unlimited. If the price of the underlying asset closes on the strike price of the Put and the Call which are bought, the maximum loss may be felt. 

5. The Bear Butterfly Spread

This is a short bear butterfly spread, and two long calls in the middle strike (ATM) and a short call in the lower and the upper strikes are the variables of this tactic. The dates of expiry of every option have to match. Furthermore, the central strike must be at an equal distance from the lower and upper strikes (called “wings”). In bearish option strategies, the most loss felt here is restricted to the net paid premium. The highest profit achieved arises from the credit gained. 

6. The Bear Put Ladder Spread

A variation of the bear put spread, the strategy is employed to gain profits out of a security’s decrease in price. The tactic is used ideally if the price of the security is not estimated to drop substantially. If the movement of the price going down is more than expected, losses are high. Profits are limited to cases in which the price of the underlying asset falls between strike prices of put options. 

7. Bear Iron Condor Spread

Also called the “short” iron condor spread, this is a trading strategy involving four parts. It consists of a bull put spread and a bear call spread in which the strike price of the short put is lower than that of the short call. For every choice, the date of expiry is the same day. The most gain received is limited to the received net credit after commissions. The most you risk equals the difference between the bull put spread or the bear call spread minus the credit which is received. 

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