Product Groups
Getting Started
Get started in the FX markets with EBS.
Connect to the leading fixed income platforms, analytics and more.
Market Regulation Advisory Notices View All MRANs
Intraday Data
Services
Subscription Based Data
Keep track of products you’re interested in, view trading data and access all your contracts in a single location.
Learn why traders use futures, how to trade futures, and what steps you should take to get started.
A bear spread consists of a buy leg and a sell leg of different strikes for the same expiration and same underlying contract. This strategy will pay off in a falling market, also known as a bear market, that is why it is referred to as a bear spread.
Bear spreads can be constructed from either going long a put spread or short a call spread.
A trader believes that the market will have a moderate drop before the options expire. If the underlying market was trading at 100, he would buy a 95 put for $3 and sell the 90 put for $2.
By selling the 90 put, he receives a premium which offsets the cost of the 95 leg. The total cost of the spread is $1. The breakeven point for the spread is 94: the 95 strike minus the cost of the spread.
The best-case scenario is if the market finishes at or below 90. Because the 95-90 put spread will pay off $5. This is the maximum payoff for the spread, regardless where the underlying finishes. If we subtract the $1 cost of the spread, the total profit for the trade will be $4
Assume the underlying finished at 87. The 95 put will pay the trader $8, but he will need to payout $3 on the 90 put. If the market finishes at 70, the 95 put will pay the trader $25, but he will need to payout $20 on the 90 put.
The worst-case scenario is if the market finishes at or above 95. Because both the 95 and 90 put expire out-of-the-money and are therefore worthless. So, the trader loses the full cost of the spread, $1. If the trader purchased only the 95 put at $3, his loss would be $3 versus $1.
If the underlying finishes at 92.5, the long 95 put will be worth $2.50 and the short 90 put expires worthless. The trader’s payout of $2.50 minus the $1 cost of the spread gives him $1.50 profit.
If the trader bought only the 95 put, his payout would still be $2.50, but that is less than the $3 he would have paid for the 95 put alone.
Selling a call is another way to be bearish on the market by allowing you to collect a premium that you keep if the underlying futures finish at or below the strike price.
Instead of buying the 95-90 put spread, we can sell the 90-95 call spread. This would entail selling the 90 call and buying the 95 call, which would result in a $4 credit with the underlying future trading at 100.
The breakeven point for this spread is 94: the 90 strike plus the spread credit of $4. This is the same breakeven point as the put bear spread.
If the market finishes below 90, the calls expire worthless. Therefore, the trader keeps the $4 he received by selling the call spread.
If the market finishes at 97, the 90 call is worth $7 and the 95 call is worth $2 . Therefore, the call spread is worth $5 dollars. The trader received $4 and must now payout $5, resulting in a $1 loss.
If the market finishes at 92.5, the 90 call is worth $2.50. The 95 call expires worthless. So, the trader must pay out $2.50 from his $4 credit. Resulting in a $1.50 profit.
These scenarios have the same outcome whether we sell a call spread or buy a put spread to create a bearish position. Traders still want the market to below the high strike of the spread.
CME Group is the world's leading and most diverse derivatives marketplace. The company is comprised of four Designated Contract Markets (DCMs). Further information on each exchange's rules and product listings can be found by clicking on the links to CME, CBOT, NYMEX and COMEX.
CME Group / Chicago HQ
Phone: +1 312 930 1000
Toll Free (US Only): +1 866 716 7274
© 2019 CME Group Inc. All rights reserved.
Careers | Site Map | Disclaimer | Privacy Policy | Cookie Policy | Terms of Use | Modern Slavery Act Transparency Statement