Advanced Strategies with Options

Bearish Strategies

In this lesson, you’ll discover the key bearish options strategies that allow you to profit when you expect the underlying asset’s price to decline. We cover four essential approaches: the long put, the short call, the bear call spread, and the bear put spread, along with how to use MenthorQ’s Q models to optimize each strategy.

The long put is one of the simplest strategies, granting you the right but not the obligation to sell the underlying at a specified strike price. By purchasing a put option, you gain bearish exposure with defined risk limited to the premium paid, unlike short selling which carries unlimited risk. For example, buying a put with a $40 strike for a $3 premium gives you a breakeven of $37 and maximum loss of $300. Key considerations include implied volatility (rising IV benefits the strategy), moneyness, and time decay which works against you as the buyer.

The short call strategy involves selling a call option to collect premium, with limited profit potential equal to the premium received but unlimited risk if the price rises. Selling a call with a $40 strike for a $5 premium yields a breakeven of $45 and maximum profit of $500. Here, decreasing implied volatility and positive theta (time decay) work in your favor, though you’ll need to maintain margin requirements with your broker.

The bear call spread and bear put spread are multi-leg strategies that limit both risk and reward. The bear call spread involves selling a call and buying a call at a higher strike, creating a credit spread. The bear put spread involves buying a put and selling a put at a lower strike, creating a debit spread. For instance, a bear call spread with strikes at $60 and $65 for a $1 net credit offers maximum profit of $100 and maximum loss of $400.

For all bearish strategies, we recommend checking specific conditions: negative Jax, bearish cumulative Jax, and appropriate relationships between price and the high volume level or eyeball level. You can use MenthorQ’s Q models to identify optimal strikes, such as the eyeball level or put support level for long puts, the high volume level or first call resistance for short calls, and combinations of these levels for the spread strategies.

Video Chapters

  1. 00:00 – Introduction to bearish strategies
  2. 00:38 – Long put strategy explained
  3. 03:18 – Short call strategy and risks
  4. 06:12 – Bear call spread mechanics
  5. 08:00 – Bear put spread setup
  6. 09:28 – Lesson conclusion

Key Takeaways

  1. The long put provides bearish exposure with defined risk limited to the premium paid, unlike unlimited risk in short selling
  2. Short call strategies offer limited profit from premium collection but carry unlimited risk as prices rise
  3. Bear call spreads and bear put spreads limit both maximum profit and maximum loss through multi-leg option combinations
  4. Use MenthorQ’s Q models including the eyeball level, high volume level, and put support levels to select optimal strike prices for each strategy
Video Transcription

[00:00:00.24] - Speaker 1
In the previous lesson we have covered the bullish strategies that benefit from an increase in the spot price. Now let's look at the bearish ones. Bearish strategies allows us to gain on a bearish view on the underlying asset. The main ones are the long put or buying a put option, the short call or selling a call option. We then have the bear call spread.

[00:00:19.50] - Speaker 1
This is a multi leg strategy that consists on selling a call and buying a call at a higher strike. And finally the bear put spread which is a multi leg strategy that consists of buying a put and selling a put at a lower strike. Lets start with the long put. Another one of the simplest option strategies is buying a put or long put together with the long call. They are the building blocks of the complex strategies with options.

[00:00:43.10] - Speaker 1
Buying a put option grants the buyer the right but not the obligation to sell a security called the underlying at expiration or before expiration at a given price, also called the strike price. Again, the advantage of using options is that we can use leverage and use less capital to have the same exposure to the underlying asset. We buy a put option if we have a bearish view on the underlying. To go short a stock, it is possible to short sell, but depending on the broker and the market, in some cases there would be limitations. Going short on a stock has potentially unlimited risk while buying a put has the defined risk profile on or before expiration.

[00:01:17.09] - Speaker 1
We can exercise the contract and sell 100 shares of the underlying at a price above the market value if the price has fallen or resell the option contract at any time. Now let's look at an example. The payoff of a long put is slightly different from the one of the long call. We have a bearish view on the underlying and the put increases in value if the price of the underlying approaches zero. In this example, we bought a put option contract with a strike price of $40 for a premium of $3.

[00:01:42.32] - Speaker 1
The cost of our option contract is $300 or $3 times 100 shares. Our maximum loss is $300 if the price of the underlying asset is above our breakeven price. At expiration, the breakeven price is $37, which is the strike price of $40 minus the $3 of the premium of the option. If at expiration the price of the underlying will be less than $37. Our strategy makes money.

[00:02:05.10] - Speaker 1
The maximum profit is in this case limited by the difference between the breakeven price and zero multiplied by the quantity of the underlying. If you recall the long call strategies, the maximum profit was unlimited in the case of the long put, the stock price can only fall to zero and cannot go beyond that level. If we decide to buy a put option, we must take into account some very important variables. First, implied volatility. If the implied volatility rises, this will have a positive impact on the strategy as the premium will tend to rise.

[00:02:32.30] - Speaker 1
Let's remember the guidelines for option trading which are as Buy an option when implied volatility is low and sell options when implied volatility is high. Then we need to consider moneyness at the money or out of the money. Put option move differently in relation to the increase in the price of the underlying and finally, time decay. If we buy options, the theta effect is not in our favor. Every day the option loses value due to the time decay.

[00:02:56.47] - Speaker 1
This is our checklist. We want to see a negative dax, a bearish cumulative jax, a bullish vex price below the eyeball level and sticky strikes below the eyeball level. Finally, let's see on how you can use the Q models to set up this strategy. We can use the eyeball level or put support level as our put strikes. The next bearish strategy is the short call.

[00:03:18.35] - Speaker 1
Selling a call naked or without owning the underlying asset has the same exposure as going short a stock or short selling. Selling a call is equivalent to sell 100 shares of the underlying asset. As we said before, selling options has different advantages for the trader. Selling options can generate additional income through premium paid by the buyer who buys the option. The option seller collects the premium.

[00:03:40.50] - Speaker 1
Selling options can also be used to protect your portfolio from future losses. For example, by selling call options on a stock you own in your portfolio, a protection strategy is represented by the COVID call strategy. Finally, generate returns from non directional movements. In fact, selling options can help you generate profit if the price stays within a price range. As a seller of a call option, we have the obligation to sell a quantity of the underlying asset at the strike price to the buyer at expiration if exercised.

[00:04:07.30] - Speaker 1
If the option goes in the money at expiration, the seller will have to deliver 100 shares of the underlying at the strike price. Selling options involves risk. Let's look at this example. When we sell options, we have limited profit potentials which is represented by the premium that we receive. In the case of the sale of naked calls or sale without owning the underlying, the risk is unlimited.

[00:04:28.42] - Speaker 1
In this example, we have sold a call option contract with a strike price of $40 for a premium of $5. The premium received is $500 or $5 times 100 shares. The premium represents Our maximum profit potential. If the price of the underlying at expiration will be lower than the strike price, the option is out of the money and has no value. So we collect the premium in full.

[00:04:49.35] - Speaker 1
The breakeven price is $45, which is calculated as the strike price plus the option premium. If at expiration, the price of the underlying is higher than the breakeven price, our strategy loses money. Our maximum loss in this case is unlimited. The price of the underlying can potentially go up to infinity. If this happens, we need to deliver 100 shares of the underlying asset to the buyer at the strike price.

[00:05:11.14] - Speaker 1
If we don't own these shares in our portfolio, we need to buy them at the market at a higher price. If we decide to sell a call, we need to take into account some very important variables. If the implied volatility goes down, this is positive for our strategy as the premium will decrease. Time decay is positive for this strategy. When we sell options, we have time or theta in our side.

[00:05:30.36] - Speaker 1
When we sell options, we need to keep in mind that there will be a margin required by the broker to keep the position active. The margin requirement is the cash held by the broker as collateral to meet the commitment. The margin is released when the position is closed and it depends on the broker. It can change according to volatility and the price of the underlying and it's not a static value and can change over time. Here we can see our checklist.

[00:05:53.24] - Speaker 1
We want to see a negative jack, a bearish cumulative jack price below the high volume level and sticky strikes below the high volume level. This is how we could use our Q models for this strategy. We can use the high volume level or first call resistance as the strikes for our call. Now let's look at the bear call spread. Let's go.

[00:06:12.22] - Speaker 1
The bear call spread is a bearish strategy that has a limited maximum profit. The strategy benefits from the falling price of the underlying. It involves selling a call option and buying a call option with a higher strike than the sold call. The expirations of the options are the same. In this case, we sell a call and collect a premium and buy a call with a higher strike to limit the risk should the price of the underlying rise.

[00:06:33.44] - Speaker 1
This is a credit spread as we receive the difference between the two premiums. The wider the spread between the call sold and the one purchased, the greater the premium or the credit collected. Now let's look at an example and the payoff of a bear call spread. We sell a call option with a strike price of $60 and buy a call option with A strike price of $65 at a net credit of $1. We receive a credit for selling the call and pay a premium for buying the call with a higher strike.

[00:06:58.54] - Speaker 1
Our maximum profit is $100 or the credit received which is $1 times 100 shares. Our breakeven is represented by the strike of the sold call plus the premium received. In this case $61. In this case, our risk is limited and is represented by the difference between the purchase call strike and the breakeven. In this case $65 -61 times 100 shares.

[00:07:20.54] - Speaker 1
The maximum loss is $400. The bear call spread has a limited risk profile compared to the short call strategy. In this strategy we are short options even though we bought a call to reduce the premium. If the implied volatility goes down, this is positive for the strategy as the premium tend to decrease. The theta factor is also positive for the strategy.

[00:07:39.47] - Speaker 1
Let's look at the checklist. We want a negative jax, a bearish cumulative JAX and sticky strikes below the high volume level. Now let's look at how to use the qmodels to set up this strategy. We could use the put support levels as the short call strikes and the high volume level as the long call strikes. Now let's move on to the last bearish strategy, the bear put spread.

[00:08:00.43] - Speaker 1
The bear put spread is a bearish strategy that has a maximum profit and a limited risk. It is a strategy that involves buying a put and selling a put with a strike lower than the purchase put. The expirations of the options are the same. In this case, we buy a put by paying a premium and sell a lower strike put to reduce the premium cost of the purchase put. This is a debit spread as we pay the difference between the two premiums.

[00:08:23.04] - Speaker 1
Let's take an example. We buy a $60 strike put option and sell a $55 strike put option at a $1 net debit. We receive a credit for selling the put and pay a premium for buying the put with a higher strike. Our maximum loss is the cost of the debit or the difference between the premium we paid and the premium we received. In this case is $100 or $1 times 100 shares.

[00:08:44.40] - Speaker 1
Our breakeven price is the strike of the purchase put minus the premium paid. In this case $59. Our maximum profit is limited and represented by the difference between the breakeven and the strike of the sold put. So $59 minus $55 times 100 shares. The maximum profit is $400.

[00:09:01.37] - Speaker 1
In this case, we are long options. Even though we have sold the put to reduce the premium, if the implied volatility rises, this will have a positive impact for the strategy. The the theta factor is negative for these strategies because it decreases the value of the option. Here is the negative Jacks, bearish cumulative Jacks and sticky strikes below the high volume level. Using qmodels, we could use the high volume level as the long put strike and the put support levels as the short put strikes.

[00:09:28.02] - Speaker 1
We are at the end of this lesson. In the next one we will look at the market neutral strateg.