Business Definition for: bear spread
bear spread
strategy in the options market designed to take advantage of a fall in the price of a security or commodity. Someone executing a bear spread could buy a combination of calls and puts on the same security at different strike prices in order to profit as the security's price fell. Or the investor could buy a put of short maturity and a put of long maturity in order to profit from the difference between the two puts as prices fell.
See also
bull spread
bear spread
trading strategy in which a trader sells contracts (goes short) in nearby months and buys contracts (goes long) in months further out, acting on the belief that short-term interest rates are rising faster than long-term rates and market prices of currencies, financial instruments, and so on, are falling. Called selling the spreadin futures trading. In options trading, a combination of puts and calls intended to take advantage of falling prices. The opposite is a
bull spread
.
Related Terms:
option strategy, executed with puts or calls, that will be profitable if the underlying stock rises in value. The following are three varieties of bull spread:
Vertical spread: simultaneous purchase and sale of options of the same class at different strike prices, but with the same expiration date.
Calendar spread: simultaneous purchase and sale of options of the same class and the same price but at different expiration dates.
Diagonal spread: combination of vertical and calendar spreads wherein the investor buys and sells options of the same class at different strike prices and different expiration dates.
An investor who believes, for example, that XYZ stock will rise, perhaps only moderately, buys an XYZ 30 call for 11/2 and sells an XYZ 35 call for ½ both options are out of the money. The 30 and 35 are strike prices and the 1½ and ½ are premiums. The net cost of this spread, or the difference between the premiums, is $1. If the stock rises to 35 just prior to expiration, the 35 call becomes worthless and the 30 call is worth $5. Thus the spread provides a profit of $4 on an investment of $1. If on the other hand the price of the stock goes down, both options expire worthless and the investor loses the entire premium.
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