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Trading Weekly Options + Online Video Course: Pricing Characteristics and Short-Term Trading Strategies by Russell Rhoads

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CHAPTER 13

Bearish Spread Trading

Like the bullish vertical spread, a bearish spread is one of the best ways offered in the option market to benefit from a bearish outlook. With a downside target in mind, a bearish spread may be the preferred method of taking a position based on that outlook. Typically a bearish spread must be held until close to or even through expiration in order to realize the full potential profit of the trade. Historically this timing component of a vertical spread meant that a bearish forecast would need to be very accurate with respect to both price target and timing. With short-dated options consistently available, bearish vertical spreads may be appropriate for several types of short term trading scenarios.

Bearish Vertical Spread

A bearish vertical spread may be initiated using either put or call options. Often put options are automatically associated with a bearish outlook, but the correct combination of call positions may be bearish as well. Despite which type of option is used, the trade will involve buying a higher strike option and selling a lower strike option. A put option with a higher strike price will have a higher premium than a put option that shares an expiration date but has a lower strike price. So when a bearish spread is created with puts there will be a debit or cost involved. Consider the option quotes in Table 13.1.

Table 13.1 Option Quotes Used to Create 30-Day Bear Put and Bear Call Spreads

A bearish put spread would be entered ...

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