Bear Call Spread: Technical and Fundamental Analysis

Posted on March 10th, 2010 admin No Comments

Technical Analysis

Identifying bear call spreads can be assisted through technical analysis. Technical analysis allows identification of expected price movement through indentifying trends through momentum indicators and trend lines. The types of chart patterns you are looking to identify a bear call trade are:

  • Strong resistance levels
  • Down trends
  • Trading ranges

Fundamental Analysis

Fundamental analysis can determine if a trade is viable or not. There are a number of fundamental factors that influence the option prices of a stock. When identifying a bear call spread you have a bearish outlook on the share. Therefore you are looking for negative news in the company or sector. As this trade also makes money if the share price does not move it if there is no news coming out of the company for the next month this can also be a positive for this particular strategy.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

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Bear Call Spread: Identifying Trades – The Greeks

Posted on March 9th, 2010 admin No Comments

Delta

When identifying trades it is essential to look at the delta of the option legs. In particular it is important to calculate the net delta of the bear call spread. The net delta is calculated by the delta of the bought call option minus the delta of the sold call option. The net delta will always be positive. The net delta indicates if the share price decreases quickly what the value of the bear call spread will be worth. For example, if a bear call spread had a net delta of 0.20, and the share price decreased by $1.00, the bear call spread would have decreased by 20 cents.

Vega

The volatility affect on a bear call spread is varied. When looking to enter a bear call spread you look to sell an out-of-the-money call option. The idea is to sell a call which has a relatively high volatility and therefore trading above its theoretical value. The bear call spread can be traded when volatility is high on the call option which allows the spread to be higher above the current share price so the stock would have to increase further before affecting the trade.

Theta

Credit spreads are trades that take advantage of the time decay nature of options. The effect or time decay is a positive for this trade. When the share price is below the sold call if the share price and volatility remain constant this value of the position will reduce and therefore increase your profit. If the stock price is closer to the lower strike price of the sold call, profits generally increase at a faster rate as time passes. Alternatively, if the underlying stock price is closer to the higher strike price of the bought call, profits generally decrease at a faster rate as time passes.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

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Bear Call Spread: Option Pay-Off Diagram

Posted on March 9th, 2010 admin No Comments

It is essential to understand the option pay-off diagram for the option strategy you are trading. It allows you to know to determine at what share price you achieve maximum profit, maximum loss and breakeven level at expiry. The bear call spread is made up of a sold call option and a bought call option at a higher strike. When combined it creates a bear call spread. See below for how the bear call option pay-off diagram is constructed. The dotted green line is the sold call and the dashed green line represents the bought call.

Sold Call

Bought Call

Bear Call Spread


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

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Bear Call Spread: The Psychology

Posted on March 9th, 2010 admin No Comments

The reasoning behind placing a credit spread is different to placing a debit spread. Bear Call Spreads and Bull Put Spreads are credit spreads. They are not as aggressive cause you do not need the share price to move to far in a certain direction for instance a bear call spread profits if the share price goes sideways or fall whereas the bear put spread requires the share price to fall to a certain level for maximum profit. This strategy profits from time decay.

The expected share price movement is neutral to slightly bearish. Selling a call option out-of-the-money you receive premium if the share price is below the sold call option strike price at expiry the premium received is the profit. The bear call spread just means you buy a call at a higher level then you sold the call to cap your risk and indentify you maximum risk rather than having no protection and potentially unlimited risk for a small percentage credit. The reasons for trading bear call spreads are;

  • Alternative to naked calls (selling calls with no protection) as you have a predefined profit and loss and a better risk vs. reward ratio.
  • Share price outlook may be neutral to slight bearish on the share price due to a resistance level.
  • Consider the bear call spread when you are expecting a small fall in the price of the stock.
  • The trade of with placing a bear call far out of the money is that the stock price can increase in share price slightly, stay flat or fall to make a profit. So even if you are wrong you can still profit from the trade.
  • This strategy can be used to produce income.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

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Bear Call Spread: Advantages and Disadvantages

Posted on March 8th, 2010 admin No Comments

Advantages of Bear Call Spread

  • Loss is limited if the underlying financial instrument rises instead of falls.
  • If the underlying instrument fails to drop below the strike price of the out-of-the -money sold call option, the profit yield will be greater than just buying put options.
  • Able to profit even when the underlying asset remains completely still.
  • Lower risk than simply writing naked call options as maximum downside is limited by the bought call option.

Disadvantages of Bear Call Spread

  • There will be no more profits possible if the share price drops beyond the strike price of the sold call option.
  • Because it is a credit spread, there is a margin requirement in order to put on the position.
  • As long as the short call options remain in-the-money, there is a possibility of it being assigned. You may then have to purchase the underlying stock to meet the sold call obligation.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

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Bear Put Spread: Trade Analysis – Risk vs. Reward

Posted on March 4th, 2010 admin No Comments

Trade Analysis

Analysing your trade is essential before placing the trade. You need to max sure you have the necessary detail and go through the following checklist:

1. Stock Selection: Double check your analysis on the stock and make sure you share price target for the bear put spread is realistic.

2. Determine entry cost, most important as it is also your maximum loss.

3. Determine max profit and check that it is realistic.

4. Make sure you have a good risk vs. reward.

Risk vs. Reward

The risk vs. reward of a trade should be calculated before placing the trade. A bear put spread should have a relatively high risk vs. reward as you need a fall in share price to attain maximum profit. A bear put spread should have a risk vs. reward of 1:1.5 or greater. You should aim for a risk reward around 1:2. This means that you need to have a 33% success rate to be a successful trader. It also helps with your risk management by allocating a risk level per trade and a maximum profit level to take profits.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

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Bear Put Spread: Technical and Fundamental Analysis

Posted on March 4th, 2010 admin No Comments

Technical Analysis

Identifying bear put spreads can be assisted through technical analysis. Technical analysis allows identification of expected price movement through indentifying trends through momentum indicators and trend lines. Technical indicators used to identify bear put spreads include:

  • Share Price Downtrend
  • Overbought – MACD and Stochastic
  • Momentum indicators
  • Breaks below support

Fundamental Analysis

Fundamental analysis can determine if a trade is viable or not. There are a number of fundamental factors that influence the option prices of a stock. When identifying a bear put spread you have a bearish outlook on the share. Therefore you are looking for negative news in the company or sector. This may be a worst then expected profit announcement or a global affect on a specific sector or industry.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

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Bear Put Spread: Identifying Trades – The Greeks

Posted on March 3rd, 2010 admin No Comments

Delta

When identifying trades it is essential to look at the delta of the option legs. In particular it is important to calculate the net delta of the bear put spread. The net delta is calculated by the delta of the bought put option minus the delta of the sold put option. The net delta of a bear put spread is always negative. The net delta indicates if the share price decreases quickly what the value of the bear put spread will be worth. For example, if a bear put spread had a net delta of -0.30, and the share price decreased by $2.00, the bear put spread would have increased by 60 cents.

Vega

The volatility affect on a bear put spread is varied. When looking to enter a bear put spread you look to buy an at-the-money put option. The idea is to buy a put which has a relatively low volatility and therefore trading at its theoretical value. The sold put is sold out-of-the-money and the aim to sell puts with higher volatility so you receive a larger premium. The strategy can be traded with high volatility as the volatility does not affect this trade as much as buying a put option. This is because the high volatility is priced into both the bought and sold call options.

Theta

The effect of time decay on this strategy varies with the underlying stock’s price level in relation to the strike prices of the bought and sold options. If the stock price is midway between the strike prices, the effect can be minimal. If the share price is closer to the higher strike price of the bought put, losses generally increase at a faster rate as time passes. Alternatively, if the share price is closer to the lower strike price of the sold put, profits generally increase at a faster rate as time passes.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

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Bear Put Spread: Option Pay-Off Diagrams

Posted on March 3rd, 2010 admin No Comments

It is essential to understand the option pay-off diagram for the option strategy you are trading. It allows you to know to determine at what share price you achieve maximum profit, maximum loss and breakeven level at expiry. The bear put spread is made up of a bought put option and a sold put option at a lower strike. When combined it creates a bear put spread. See below for how the bear put option pay-off diagram is constructed. The dotted green line is the sold put and the dashed green line represents the bought put.

Sold Put

Bought Put

Bear Put Spread


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

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Bear Put Spread: The Psychology

Posted on March 2nd, 2010 admin No Comments

The psychology or reasoning behind placing a bear put spread is determined by the expected share price move and analysis of “The Greeks” and how they affect the option prices.

The expected share price movement is bearish meaning your view is the share price will decrease. This means you would buy a put option to take advantage of a fall in the share price, however because you are selling an out-of-the-money put to receive a premium there is limited profit potential. The reasons for doing this are;

  • A premium is received and it lower your entry cost.
  • Share price outlook may be a bearish share price decrease towards a support level.
  • Also consider the bear put spread when you are expecting a limited fall in the price of the share.
  • Just buying a straight put may be too expensive so selling an option against it may make the option trade affordable.
  • A bear put spread has a higher breakeven price than just buying a put.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

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