BEARISH PLAYS
LIMITED RISK
Long Put
· Easy to execute and manage
· The delta of a put tells you your exposure to changes in the stock
· The delta of a put will change with stock price movement and the passage of time
· Don't forget about time decay (negative theta)
· Keep in mind that volatility of the underlying and fluctuations in implied volatility (supply and demand for premium) affect option prices
Put Back Spread
· Long more lower strike puts and short higher strike put at same expiration
· Like a long put, it has unlimited downside profit potential with limited risk
· At expiration, the stock needs to be significantly below the long strike to make money
· This position has net long options, and is usually long volatility (vega)
· Be aware that a backspread can be initiated for a debit (pay for it) or credit (receive money for it)
· The potential liability is the difference between the strikes
Bear Vertical (long put vertical or short call vertical)
· Long higher strike put (call) and short lower strike put (call) at same expiration
· The bigger the difference between the strikes, the bigger the potential profit. And also the bigger the cost
· Your maximum loss and profit are limited
· Generally speaking, it's an inexpensive way to play the downside in a stock or index
· It is a conservative way to get short, less expensively, and with limited risk.
Long Lower Strike Butterfly
· Relatively inexpensive option strategy that has limited risk and limited profit potential
· The closer a butterfly is to expiration, the more it will react to changes in the stock price
· A strategy used by professional traders for years because of its protective characteristics
· For a long butterfly, you want the stock to drop to the middle strike
Long Lower Strikes Time Spread
· Long back month option and short front month option at the same strike
· Time spreads have limited risk and limited profit potential
· Relatively low cost position with no margin required
· Be aware that implied volatility can change at different rates in each month
· This spread works best if the stock moves down to the strike price slowly, allowing the premium of the short call to erode at a quicker rate
UNLIMITED RISK
Short Stock
· Sell short, close your eyes, and pray that it tanks – and don't forget that you owe the dividends
· Check the hard-to-borrow list before you short a stock
· Short stock requires the sale to occur on an up-tick or zero-plus tick in the stock
· Isolate your speculation – and you may find an option position that has more desirable risk characteristics than short stock
Short Combo
· "Synthetically" short stock
· Long put and short call at same strike and expiration
· Has the same risk exposure as short stock, with interest and dividends built into the combo price
· Remember: there is no short stock rebate for retail customers
· A short combo is a way of getting past the down-tick ruleTemplate for shorting stock
· Unlike short stock, short combos expire, and unless it is exactly at the money, short stock will be the result of the put exercise or the call assignment.
Short Semi-Stock (off strike combo)
· Similar to short combo, but has smaller negative delta
· Long lower strike put and short higher strike call at same expiration
· The position is generally initiated as premium-neutral but that can change quickly as the stock price moves
· Requires less margin than either short stock or same-strike combo
Short Call
· Potential profit is limited to the price of the call
· Risk is unlimited
· Generally requires less margin than shorting stock
Call Ratio Spread for Credit
· Long lower strike call and short more higher strike calls at same expiration
· The most common ratio between short and long is 2:1
· Ratio spreads have unlimited upside risk – monitor your position carefully
· At expiration, greatest profit at the higher strike price
· Because the position is net short options, there is an increased volatility risk