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Thursday, November 20, 2008

Bearish Strategies - BEAR SPREAD: Using Puts

When to use: 

When you are bearish on market direction.

A Put Bear Spread has the same payoff as the Call Bear Spread as both strategies hope for a decrease in market prices. The choice as to which spread to use, however, comes down to risk/reward.

A good tip is to compare the market prices of both spreads to determine which has the better payoff for you.

Bearish Strategies - BEAR SPREAD:USING CALLS

When to use: 
When you are mildly bearish on market direction.

A call bear spread is usually a credit spread. A credit spread is where the net cost of the position results in you receiving money up front for the trade. eg. you sell one Nifty 4000 call option (receive Rs 80) and the buy one Nifty 4200 call option (Rs. 50). The net effect is a credit of Rs 30.

This type of spread is used when you are mildly bearish on market direction. Same idea as the Call Bull Spread but reversed - i.e. you think the market will go down but think that the cost of a short stock or long put is too expensive.

Bearish Strategies - SHORT CALL

When to use: 
When you are bearish on market direction and also bearish on market volatility.

A short call is also known as a Naked Call. Naked calls are considered very risky positions because your risk is unlimited.

Bearish Strategies - Long Put

When to use: 

When you are bearish on market direction and bullish on market volatility.
Like the long call a long put is a nice simple way to take a position on market direction without risking everything. Except with a put option you want the market to decrease in value.

Buying put options is a fantastic way to profit from a down turning market without shorting stock. Even though both methods will make money if the market sells off, buying put options can do this with limited risk.


BEARISH STRATEGIES - when one is having a bearish view on the direction of the underlying, and expects the price of the underlying to fall over time. Various strategies under this are:
1. Long Put
2. Short Call
3. Bear Spread (using Call OR Put)
4. Bearish Combo / Synthetic Short (using Call AND Put)
5. Put BackSpread (Ratio Spread)
6. Short Call Spread + Put
7. Long Straddle + Call

Monday, November 17, 2008