Bear Spreads

As is the case for bull spreads, a bear spread strategy can be constructed using call or put options. Let’s first examine the case of bear put spreads which consist of buying a put with strike K2 and selling a put on the same underlying with strike K1 lower than K2. Therefore, holding a bear put spread requires an initial investment equal to Put (K2, T) – Put (K1, T).

On the other hand, a bear spread strategy can also be realized by combining a long position in a call struck at K2 and a short position in a call struck at K1. However, it is important to note that the payoff of a bear call spread is always negative whereas the payoff of a bear put spread is always positive. This is due to the fact that an investor implementing a bear call spread strategy is in fact selling a financial product and receives a global premium equal to Call (K1, T) – Call (K2, T). We can then conclude that a bear spread strategy can be achieved through buying bearish put spreads or selling bearish call spreads.

Delta

Delta of a bear put spread is always negative, which proves that the holder of the bear put spread strategy is always short the stock price.

Gamma and Vega

The values of Gamma and Vega of bear put spreads are the opposite values of Gamma and Vega of bull call spreads (with equivalent strikes). Here again, traders have to be cautious when managing the Vega of call spreads because they can change sign as the underlying moves.