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Bear Spread Case Study

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The profit potential of the bull spread is limited to the exercise price of the option with the higher exercise price. The potential profit range is actually the difference between the exercise prices of the two options. In the case when the price of the underlying asset skyrockets and goes far above the option with the higher exercise price, the trader may feel huge regret that he did not simply long the call. But this is the price of limiting the potential risks. The maximum potential loss of the bull spread is limited to the amount paid for the premiums of the two options, or in other words amount paid to enter the bull spread position. Due to the fact that the value of the bull spread is not dependent on implied volatility, which his possible to anticipate up to some degree, and that it is rather dependent on other market factors, this strategy is usually employed by veterans and experienced traders. These people are able to anticipate to what point the price of a particular stock will go up and decide whether to take a long position or employ the bull spread and make a profit on a temporary price increase.
Bear Spread
Second type of a vertical spread is a bear spread. Traders usually employ this strategy when they believe that the price of the underlying financial asset will go down. They actually do not expect the price to …show more content…

At the same time the profit potential is limited to the premiums received for the short call and short put options. In the ideal case, the price of the underlying asset at the expiration date would be equal to the premium received for the short positions. In that way the profit would be maximized. This actually means that all of the four options would expire worthless and the price of the underlying asset would be equal to the premium received for the short call. However, the probability of this happening is very

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