Spread Trading: An Introduction to Trading Options in Nine Simple Steps

CHAPTER 41

Bear vs. Bear

“Now let’s compare these bearish trades just as we compared the bullish ones,” said Aaron. “To begin with, of course, both are basically bearish trades; but one, the bear call, is a credit trade, and the other, the bear put, is a debit trade. Just as with the bullish trades, everything about these bearish trades follows from the difference between a debit and a credit strategy.”

“We know, for example,” said Nate, “that because the bear call is a credit trade, the primary instrument has to be the one we sell: it’ll be the short instrument. And, of course, in the case of a bear call, that means it will be the short call.”

“Right,” said Lon, “the credit we receive for this short call is the way we make money in this trade. And since we don’t want to go in the money on this short call, we definitely place it out of the money—and not just slightly out of the money either. We want to stay out of the money and simply pocket this credit at the end of the expiration period.”

“All this means,” added Shorty, “is that our limiting instrument will be the long call, and we place it further out of the money than the short call. And because it’s placed further out of the money, it’s less expensive. So, in this case, we’re taking in more than we’re paying out: and, of course, that’s what it means for this to be a credit trade. We’re starting out with a net credit.”

“And how do we make a profit in this credit trade?” asked Nate.

“Our profit is simply this net credit—the ...