Commodities F&O

Is there a way I can play the market with options when moderately bearish?

Answer

3 years ago

You play a bull call spread when you are moderately bullish. Similarly, you can play a bear put spread when you are moderately bearish. In a bear put spread, you buy a higher strike put option and sell a lower strike put option of the same stock or same index for the same expiry. You normally use this strategy when you are moderately bearish. Check the payoff table below.

Buy RIL Dec 1180 put at Rs.33 and Sell RIL Dec 1120 call at Rs.13

Long Put Strike	RIL CMP	Difference	ITM/OTM	Profit/Loss	Option Premium	P/L on Long Put	Short Put Strike	RIL CMP	Difference	ITM/OTM	Profit/Loss	Option Premium	P/L on Long Call	Net Profit
1180	900	280	ITM	280	-33	247	1120	900	-220	ITM	-220	13	-207	40
1180	920	260	ITM	260	-33	227	1120	920	-200	ITM	-200	13	-187	40
1180	940	240	ITM	240	-33	207	1120	940	-180	ITM	-180	13	-167	40
1180	960	220	ITM	220	-33	187	1120	960	-160	ITM	-160	13	-147	40
1180	980	200	ITM	200	-33	167	1120	980	-140	ITM	-140	13	-127	40
1180	1000	180	ITM	180	-33	147	1120	1000	-120	ITM	-120	13	-107	40
1180	1020	160	ITM	160	-33	127	1120	1020	-100	ITM	-100	13	-87	40
1180	1040	140	ITM	140	-33	107	1120	1040	-80	ITM	-80	13	-67	40
1180	1060	120	ITM	120	-33	87	1120	1060	-60	ITM	-60	13	-47	40
1180	1080	100	ITM	100	-33	67	1120	1080	-40	ITM	-40	13	-27	40
1180	1100	80	ITM	80	-33	47	1120	1100	-20	ITM	-20	13	-7	40
1180	1120	60	ITM	60	-33	27	1120	1120	0	ATM	0	13	13	40
1180	1140	40	ITM	40	-33	7	1120	1140	20	OTM	0	13	13	20
1180	1160	20	ITM	20	-33	-13	1120	1160	40	OTM	0	13	13	0
1180	1180	0	ATM	0	-33	-33	1120	1180	60	OTM	0	13	13	-20
1180	1200	-20	OTM	0	-33	-33	1120	1200	80	OTM	0	13	13	-20
1180	1220	-40	OTM	0	-33	-33	1120	1220	100	OTM	0	13	13	-20
1180	1240	-60	OTM	0	-33	-33	1120	1240	120	OTM	0	13	13	-20
1180	1260	-80	OTM	0	-33	-33	1120	1260	140	OTM	0	13	13	-20
1180	1280	-100	OTM	0	-33	-33	1120	1280	160	OTM	0	13	13	-20
1180	1300	-120	OTM	0	-33	-33	1120	1300	180	OTM	0	13	13	-20
1180	1320	-140	OTM	0	-33	-33	1120	1320	200	OTM	0	13	13	-20
1180	1340	-160	OTM	0	-33	-33	1120	1340	220	OTM	0	13	13	-20
1180	1360	-180	OTM	0	-33	-33	1120	1360	240	OTM	0	13	13	-20
1180	1380	-200	OTM	0	-33	-33	1120	1380	260	OTM	0	13	13	-20
1180	1400	-220	OTM	0	-33	-33	1120	1400	280	OTM	0	13	13	-20
1180	1420	-240	OTM	0	-33	-33	1120	1420	300	OTM	0	13	13	-20
1180	1440	-260	OTM	0	-33	-33	1120	1440	320	OTM	0	13	13	-20

In a bear put spread there are two distinct positions. You are buying RIL Dec 1180 put at Rs.33 and simultaneously selling Rs.1120 put at Rs.13. Effectively, your net cost of the strategy is Rs.20 (33 – 13). This will be your maximum loss as you can see in the table above. At no point does the maximum loss exceed Rs.20. On the profit side your maximum profit will be earned at the strike of Rs.1120 where you have sold the put. Beyond that point, whatever you earn on the 1180 put you will lose on the 1120 put which you have sold. The breakeven point is the lower strike of 1180 minus the net cost of Rs.20 which is Rs.1160 where you will see that the profits are zero. This strategy should ideally be used only when you are moderately bearish so that you can reduce your cost of buying a put option by selling a lower put option. As you can see in the table above, below Rs.1120, your profits peak out at Rs.40, which is where it will continue in the future too as you go lower on the price chart.

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