When to use a Bear Put Spread vs. a Bear Call Spread

February 1, 2010

A Bear Call Spread and a Bear Put Spread have similar properties.  Graphically, they are similar and they are both constructed to profit from a declining market.

When using a Bear Put Spread, the position is a debit spread.  When using a Bear Call Spread, the position is a credit spread.  When should use a Bear Put Spread versus  a Bear Call spread, to exploit a declining market?

The choice of using a Bear Put Spread or Bear Call Spread is typically determined by the risk and reward profile the two similar trades.

Sometimes a Bear Put Spread is the better choice, even though entered initially as a debit spread.  Sometimes the Bear Call Spread is the better choice (which is always a credit spread).

When determining which spread to use, we are not about whether the spread is a credit spread or a debit spread.  In this example, our first and foremost concern is that we want to see the market under review decline.

An effective way to analyze the trades is to review the best-case and worst-case scenarios, margin requirements and option “Greeks” associated with the trades.  An effective way of analyzing profit and loss for either of these bearish strategies is to set up the trades such that the lower strike for the Bear Call Spread is the same as the lower strike for the Bear Put Spread.  Then, to compare apples to apples, select strikes equally far away from the strike price that is the same for each spread.

Once this is done, conduct a “what if” on the losses incurred resulting from a 20 point, 30, point and 40 point move against the bearish position.  Ideally, we want to be able to incur an adverse price move with minimal loss.  Sometimes, the determining factor comes down to this – which spread, the Bull Put Spread or the Bear Put Spread, incurs a smaller loss given an adverse move against our market bias.

Other factors that come into play are the option Greeks, such as Delta, Gamma, Vega and Theta.  Investors weigh these option Greek factors differently.  Option Greeks relate to tolerances in time decay (Theta), degree of directional bias (Delta) and other factors that may affect the value of the position that is deployed.

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