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Bearish Options Trading Strategies Explained: If the Bulls express their view in the Options market by Buying Call Option, then the Bears express their view by Buying Put Option. In this article, we will try and understand the option strategies for the BEARISH Market.

“Call Options give the right to the Holder of the option the right (not the obligation) to buy the underlying asset on or before expiry, whereas the Put Option gives the holder the right (not the obligation) to sell the underlying asset on or before expiry!”

Option trading need not always be a game of large gains or nothing. There are various strategies that can be devised to express one’s view and take minimal risk and earn decent returns.

Bearish markets are those markets where the expectation of weakness in the price of the underlying asset is expected to continue. Let us try and understand few option trading strategies for Bearish markets, that have the potential to generate decent returns by taking moderate risks. Keep reading.

Bearish Options Trading Strategies

Here are two of the common bearish options trading strategies for beginners to make profits trading options:

1) Bear Put Spread

Assumptions while using this strategy:

Bear Put Spread is a Two-legged strategy i.e. there are two options positions running simultaneously. There is an assumption of weakness in the market and the next level of supports is likely to be tested by the market.

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Implementation of Bear Put Strategy

To implement Bear Put Spread:

  • We have to buy One In the Money Put Option
  • Sell One Out of Money Put Option

The following are the assumptions under this strategy:

  • All the strikes belong to the same underlying Asset.
  • Both the options have the same expiry
  • And both the legs have the same number of contracts

Let us understand this strategy with the help of an example:

Spot Price of Nifty: 10050

The Following are the option legs traded:

  • An In the Money (ITM) Put Option = 10200 PE, premium Paid = 180 units
  • And, An out of Money (OTM) Put Option = 10000 PE, premium received = 60 units

Overall, this is a ‘Net Debit’ strategy. The P/L at the beginning of this strategy is -120 units(60-180)

Let us understand the payoff at various levels of expiry:

Case 1: Nifty upon expiry goes up to 10400, then:

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Example of the Bear Put Spread Strategy - Position 1 | Bearish Options Trading Strategies

The total P/L (net payoff) in this case is -120 units (-180+60)

Case 2: If Nifty upon expiry goes up to 10300, then:

Example of the Bear Put Spread Strategy - Position 2

The total P/L (net payoff) in this case is -120 units (-180+60)

Case 3: If Nifty upon expiry goes up to 10080, then:

Example of the Bear Put Spread Strategy - Position 3

The total P/L (net payoff) in this case is 0 units (-60+60). This is also the BEP for this strategy

Case 4: If Nifty upon expiry goes to 10000, then:

Example of the Bear Put Spread Strategy - Position 4

The total P/L (net payoff) in this case is 80units (20+60)

Case 5: If Nifty upon expiry goes to 9800, then:

Example of the Bear Put Spread Strategy - Position 5

The total P/L (net payoff) in this case is 80 units (220-140)

Payoff Using Bear Put Spread

Payoff Using Bear Put Spread Strategy

Interpretation of Bear Put Spread

  • The Maximum and Minimum profit potential is capped in this strategy
  • The summation of maximum profit and loss is equal to the difference between two chosen strike prices
  • The Breakeven Point in this strategy is reached when the spot price is the difference between the higher strike price and ‘Net Debit’

 

2) Bear Call Spread

Bear Call Spread is another Bearish Options trading strategy. This strategy also runs on the same assumption as the Bear Put Spread. There are two legs in this strategy and there is an expectation of weakness in the market. But unlike the Bear Put strategy, In the Bear Call strategy, we have two legs of Call options positions running simultaneously. And we can express our Bearish view by selling Call options and pocket the premium.

Implementation of this strategy

To execute this strategy, we need to:

  • Buy one Out of Money call option
  • Sell one In the Money call option

Both the Options should have the same expiry date and same underlying Asset

Let us understand this strategy with the help of an example. Assume, the sot price of Nifty is 9500

The following are the legs in this strategy:

  • Buy one Out of Money Call option of 9600 CE, premium paid: 60 units
  • Sell one In the Money Call option of 9350 CE, the premium received = 170 units

The net payoff at the time of entering the contract is 11o units (170-60). This is a Net Credit strategy

Case 1: If the Nifty Expires at 9700, then:

Example of the Bull Call Spread Strategy - Position 1 | Bullish Options Trading Strategies

The Net payoff using this strategy will be -140 units (40-180)

Case 2: If the Nifty Expires at 9600, then:

Example of the Bull Call Spread Strategy - Position 2

The Net payoff using this strategy will be -140 units (-60-80)

Case 3: If the Nifty Expires at 9460, then:

Example of the Bull Call Spread Strategy - Position 3

The Net payoff using this strategy will be 0 units (-60+60). This is also the point of Breakeven in this strategy.

Case 4: If the Nifty Expires at 9350, then:

Example of the Bull Call Spread Strategy - Position 4

The Net payoff using this strategy will be 110units (-60+170)

Case 4: If the Nifty Expires at 9200, then:

Example of the Bull Call Spread Strategy - Position 5

The Net payoff using this strategy will be 110 units (-60+170)

Payoff using Bear Call Strategy

Payoff Using Bear Call Spread Strategy

ALSO READ:

How to Trade Options In India? Step-by-Step Guide!

Closing Thoughts

Option Trading strategies for Bearish markets have the potential of generating decent returns for traders, but one needs to be disciplined while trading using these strategies. One should enter both the option positions simultaneously and exit them together.

Improvisation while entering or exiting these strategies comes with its own risk as it is possible that the unedited position might completely go against and we might incur huge losses.

That’s all for this post. We hope you have learned something new from our article on Bearish Options Trading Strategies. Let us know your views in the comment section below. Happy Investing and Trading!