Last Updated on 2025-01-18 by Admin
The Bear Spread Spread, also known as a Double Bear Spread or Combination Bear Spread, is a sophisticated options strategy that combines elements of two Bear Spread strategies (typically a Bear Put Spread or Bear Call Spread) to create a position with multiple layers of risk and reward. While it’s not as commonly discussed as simpler spreads, it can be an effective tool in specific market conditions.
Key Elements
- Two Separate Bear Spreads: The strategy typically involves setting up two Bear Put Spreads or Bear Call Spreads simultaneously, or sometimes a combination of both. The two spreads have different strike prices and expiration dates, allowing for a more nuanced risk-reward profile.
- Different Strike Prices: The two spreads will have different strike prices, often targeting different price ranges for the underlying asset. This allows for more specific risk control in a moderately bearish market environment.
- Potential Use of Different Expiration Dates: The positions in the Bear Spread Spread may also use options with different expiration dates, adding another layer of flexibility and allowing for the possibility of managing risk over multiple time frames.
Objective
The goal of the Bear Spread Spread is to create a complex bearish position where the trader can take advantage of the moderate bearish movement of the underlying asset, while limiting risk exposure. This strategy is designed to allow the trader to capitalize on multiple levels of price movement, making it more flexible and potentially more profitable in a market with moderate volatility.
The strategy has limited profit potential but offers greater flexibility in structuring risk-reward scenarios, particularly if a trader believes the underlying asset will decline in stages or at varying rates over time.
Key Variations
- Double Bear Put Spread: Involves using two different Bear Put Spreads with varying strike prices or expiration dates.
- Double Bear Call Spread: Involves using two different Bear Call Spreads with varying strike prices or expiration dates.
- Combination Bear Spread: A blend of Bear Call Spreads and Bear Put Spreads, typically combining the best aspects of both strategies.
Construction
Let’s break down a Double Bear Put Spread example:
Example Setup
Imagine you have a stock trading at $100. You are bearish on the stock and want to create a Double Bear Put Spread:
- Bear Put Spread 1 (short-term):
- Buy a Put option at a strike price of $105 for a premium of $7.
- Sell a Put option at a strike price of $100 for a premium of $3.
- Net premium paid = $7 – $3 = $4 per share.
- Bear Put Spread 2 (long-term):
- Buy a Put option at a strike price of $110 for a premium of $10.
- Sell a Put option at a strike price of $105 for a premium of $6.
- Net premium paid = $10 – $6 = $4 per share.
Net Premium Paid
- The total premium paid for the entire position is $4 (from the first Bear Put Spread) + $4 (from the second Bear Put Spread) = $8 per share.
Maximum Profit
- For both Bear Put Spreads, the maximum profit happens if the stock price is below $100 at expiration.
- Maximum Profit for Bear Put Spread 1: $105 (strike of the long put) – $100 (strike of the short put) – $4 (net premium paid) = $1 per share.
- Maximum Profit for Bear Put Spread 2: $110 (strike of the long put) – $105 (strike of the short put) – $4 (net premium paid) = $1 per share.
- Total Maximum Profit = $1 + $1 = $2 per share.
Maximum Loss
- The maximum loss happens if the stock price is above $105 at expiration, as the long puts will expire worthless, and the short puts will be exercised.
- Maximum Loss for Bear Put Spread 1: The total premium paid, which is $4 per share.
- Maximum Loss for Bear Put Spread 2: The total premium paid, which is $4 per share.
- Total Maximum Loss = $4 + $4 = $8 per share.
Breakeven Points
- Breakeven for Bear Put Spread 1: The breakeven point is the strike price of the short put minus the net premium paid.
- Breakeven = $100 – $4 = $96 per share.
- Breakeven for Bear Put Spread 2: The breakeven point is the strike price of the short put minus the net premium paid.
- Breakeven = $105 – $4 = $101 per share.
- Overall Breakeven: Since there are two separate spreads, the overall breakeven point will depend on the behavior of the stock price relative to both spreads.
Risk/Reward Profile
- Maximum Profit: The maximum profit is limited to the net credit received from the two spreads combined (after considering premiums paid and received).
- Maximum Loss: The maximum loss is also limited and is the total premium paid for both spreads.
- Breakeven: There will typically be two breakeven points — one for each spread — and the stock price will need to fall between those two points for the trade to be profitable.
When to Use
- You expect the price of the underlying asset to decline in stages (not a sharp drop). This strategy can be useful if you expect the asset’s price to move within certain ranges over time, and you want to structure the trade to take advantage of moderate declines over various periods.
- The strategy works well when you want to limit risk exposure while still profiting from a moderate decline in the underlying asset.
- It’s useful if you believe the market is moderately bearish and are looking for a flexible way to set up multiple risk/reward scenarios.
Pros
- Defined Risk: The maximum loss is known in advance and is limited to the net premium paid for the two spreads.
- Multiple Opportunities for Profit: By combining two Bear Spreads, you can take advantage of multiple price movements or time frames.
- Cost Efficiency: Like other spread strategies, a Bear Spread Spread can be more cost-effective than buying a single put option outright, as the premium from the sold options helps offset the cost.
Cons
- Limited Profit: The profit potential is capped, and the strategy will not be as profitable if the underlying asset falls sharply below the lower strike prices.
- Complexity: This strategy is more complex than a standard Bear Put Spread or Bear Call Spread and may require more management.
- Requires Correct Timing: You need the price of the underlying asset to decline moderately in a staged manner, and the market must align with your expectations for both legs of the spread.
Example Summary
- Stock price = $100
- Bear Put Spread 1: Buy $105 Put for $7, Sell $100 Put for $3 (Net premium paid = $4)
- Bear Put Spread 2: Buy $110 Put for $10, Sell $105 Put for $6 (Net premium paid = $4)
- Total Net Premium Paid = $8
- Maximum Profit = $2 per share (if stock falls below $100)
- Maximum Loss = $8 per share (if stock stays above $105)
- Breakeven = $96 (for Spread 1), $101 (for Spread 2)
Conclusion
The Bear Spread Spread (or Double Bear Spread) is a more advanced options strategy that combines two separate Bear Spreads. It’s designed for a moderately bearish outlook and allows for more specific structuring of risk and reward. While the profit potential is capped, it provides flexibility in terms of managing risk over multiple time frames and price ranges. It is most useful in markets where you expect the price of the underlying asset to decline gradually and moderately over time.
