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Bearish Trend Option Strategies

 

The most popular bearish view option strategies are:

a. Naked Put Buy

b. Put Spread

c. Calendar Put

d. Diagonal Call

e. Put Ratio Backspread

f. Modified Put Butterfly

g. Bear Call Spread

h. Strip

i. Short Combo

Naked Put Buy

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.

Directional view: Bearish

Implied Volatility view: Increase

Max loss: Limited

Max Profit: Unlimited

Greeks impact:

Increase in IV: Positive

Theta Decay: Negative

Delta: Negative

Unfavorable Scenario:

a. The asset price rise or remains sideways

b. Decrease in Implied Volatility (IV)

Payoff Diagram:

Naked Put buy.jpg
Put Spread

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

Directional view: Mild Bearish

Implied Volatility view: Increase

Max loss: Limited

Max Profit: Limited

Greeks impact:

Increase in IV: Positive

Theta Decay: Negative

Delta: Negative

Unfavorable Scenario:

a. The asset price rise or stays above the long put option strike price

b. Decrease in Implied Volatility (IV)

Payoff Diagram:

Calendar Put

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. 

Directional view: Mild Bearish

Implied Volatility view: Increase

Max loss: Limited

Max Profit: Limited

Greeks impact:

Increase in IV: Positive

Theta Decay: Positive

Delta: Negative

Unfavorable Scenario:

a. The asset price stays outside the breakeven range

b. Decrease in Implied Volatility (IV)

Payoff Diagram:

Calendar Put.jpg
Diagonal Call

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.

Directional view: Bearish

Implied Volatility view: Decrease

Max loss: Limited

Max Profit: Limited

Greeks impact:

Increase in IV: Negative

Theta Decay: Positive

Delta: Negative

Unfavorable Scenario:

a. The asset price rise or stays above the long put option strike price

b. Increase in Implied Volatility (IV)

Payoff Diagram:

Diagonal call.jpg
Put Ratio Backspread

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.

Directional view: Bearish

Implied Volatility view: Increase

Max loss: Limited

Max Profit: Limited

Greeks impact:

Increase in IV: Positive

Theta Decay: Negative

Delta: Negative

Unfavorable Scenario:

a. The asset price rise or remains above bought put option strike price

b. Decrease in Implied Volatility (IV)

Payoff Diagram:

Put Ratio Backspread.jpg
Modified Put Butterfly

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

Directional view: Mild Bearish

Implied Volatility view: Decrease

Max loss: Limited

Max Profit: Limited

Greeks impact:

Increase in IV: Negative

Theta Decay: Positive

Delta: Negative

Unfavorable Scenario:

a. The asset price falls or remains about bought ITM option strike price

b. Increase in Implied Volatility (IV)

Payoff Diagram:

Modified Put Butterfly.jpg
Bear Call Spread

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.

Directional view: Neutral to Bearish

Implied Volatility view: Decrease

Max loss: Limited

Max Profit: Limited

Greeks impact:

Increase in IV: Negative

Theta Decay: Positive

Delta: Negative

Unfavorable Scenario:

a. The asset price falls or remains above the long OTM option strike price

b. Increase in Implied Volatility (IV)

Payoff Diagram:

Bear Call Spread.jpg
Strip

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.

Directional view: Bearish

Implied Volatility view: Increase

Max loss: Limited

Max Profit: Unlimited

Greeks impact:

Increase in IV: Positive

Theta Decay: Negative

Delta: Negative

Unfavorable Scenario:

a. The asset price remains in a range

b. Decrease in Implied Volatility (IV)

Payoff Diagram:

Strip.jpg

h. Short Combo:

Short Combo

Short Combo is a strong bearish bias strategy. It is a combination of a long OTM PUT option & short OTM call option.

Directional view: Bearish

Implied Volatility view: Neutral

Max loss: Unlimited

Max Profit: Unlimited

Greeks impact:

Increase in IV: Positive

Theta Decay: Negative

Delta: Negative

Unfavorable Scenario:

The asset price falls or remains below the long put option strike price

Payoff Diagram:

Short Combo.jpg
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