Bearish Trend Option Strategies
The most popular bearish view option strategies are:
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a. Naked Put Buy:
The buyer of a put option expects the asset price to go down in the short term or for a brief period. It is a single leg long put option contract.
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Directional view: Bearish
Implied Volatility view: Increase
Max loss: Limited
Max Profit: Unlimited
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Greeks impact:
Increase in IV: Positive
Theta Decay: Negative
Delta: Negative
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Unfavorable Scenario:
a. The asset price rise or remains sideways
b. Decrease in Implied Volatility (IV)
Payoff Diagram:
b. Put Spread:
Put Spread is the combination of buying an ATM (at-the-money) put option contract & shorting an OTM (out-of-the-money) put option contract. It is a debit option strategy
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Directional view: Mild Bearish
Implied Volatility view: Increase
Max loss: Limited
Max Profit: Limited
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Greeks impact:
Increase in IV: Positive
Theta Decay: Negative
Delta: Negative
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Unfavorable Scenario:
a. The asset price rise or stays above the long put option strike price
b. Decrease in Implied Volatility (IV)
Payoff Diagram:
c. Calendar Put:
A calendar put is a combination of shorting the current expiry ATM (at-the-money) put option contract & going long next expiry ATM put option contract.
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Directional view: Mild Bearish
Implied Volatility view: Increase
Max loss: Limited
Max Profit: Limited
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Greeks impact:
Increase in IV: Positive
Theta Decay: Positive
Delta: Negative
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Unfavorable Scenario:
a. The asset price stays outside the breakeven range
b. Decrease in Implied Volatility (IV)
Payoff Diagram:
d. Diagonal Call:
A diagonal call is a bearish strategy. It is a combination of shorting the near-expiry ATM call and the long far-expiry OTM call.
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Directional view: Bearish
Implied Volatility view: Decrease
Max loss: Limited
Max Profit: Limited
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Greeks impact:
Increase in IV: Negative
Theta Decay: Positive
Delta: Negative
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Unfavorable Scenario:
a. The asset price rise or stays above the long put option strike price
b. Increase in Implied Volatility (IV)
Payoff Diagram:
e. Put Ratio Backspread:
Put Ratio Backspread is a bearish strategy. It is a combination of shorting the near-expiry ATM put and buying twice the quantity of OTM (out-of-the-money) puts.
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Directional view: Bearish
Implied Volatility view: Increase
Max loss: Limited
Max Profit: Limited
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Greeks impact:
Increase in IV: Positive
Theta Decay: Negative
Delta: Negative
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Unfavorable Scenario:
a. The asset price rise or remains above bought put option strike price
b. Decrease in Implied Volatility (IV)
Payoff Diagram:
f. Modified Put Butterfly:
Modified put butterfly is a bearish strategy. It is a combination of a long ITM put option & shorting twice the quantity ATM put options & a long far OTM put option
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Directional view: Mild Bearish
Implied Volatility view: Decrease
Max loss: Limited
Max Profit: Limited
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Greeks impact:
Increase in IV: Negative
Theta Decay: Positive
Delta: Negative
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Unfavorable Scenario:
a. The asset price falls or remains about bought ITM option strike price
b. Increase in Implied Volatility (IV)
Payoff Diagram:
g. Bear Call Spread:
Bear Call Spread is a bearish strategy. It is a combination of shorting the OTM call option & buying an upper strike OTM call option as a hedge.
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Directional view: Neutral to Bearish
Implied Volatility view: Decrease
Max loss: Limited
Max Profit: Limited
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Greeks impact:
Increase in IV: Negative
Theta Decay: Positive
Delta: Negative
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Unfavorable Scenario:
a. The asset price falls or remains above the long OTM option strike price
b. Increase in Implied Volatility (IV)
Payoff Diagram:
h. Strip:
Strip is similar to the long straddle options strategy. It only requires one adjustment of buying additional put options for a bearish bias.
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Directional view: Bearish
Implied Volatility view: Increase
Max loss: Limited
Max Profit: Unlimited
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Greeks impact:
Increase in IV: Positive
Theta Decay: Negative
Delta: Negative
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Unfavorable Scenario:
a. The asset price remains in a range
b. Decrease in Implied Volatility (IV)
Payoff Diagram:
h. Short Combo:
Short Combo is a strong bearish bias strategy. It is a combination of a long OTM PUT option & short OTM call option.
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Directional view: Bearish
Implied Volatility view: Neutral
Max loss: Unlimited
Max Profit: Unlimited
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Greeks impact:
Increase in IV: Positive
Theta Decay: Negative
Delta: Negative
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Unfavorable Scenario:
The asset price falls or remains below the long put option strike price
Payoff Diagram:
