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# Bear Put versus Bear Call

Josip Causic
Instructor

This article shall briefly look at the difference between a Bear Call spread and Bear Put spread. To learn the intricacy of verticals, please review our article on that topic that was published previously.

52 week High Historical Volatility

Current IV

52 week Low Historical Volatility

 41% Approx 18+/- % 6%
Figure 1: XEO on Tuesday 12/27/2011

Looking at the table above, we clearly see that in the current environment, XEO’s IV is only about 12 percentage points off the low versus being (41 – 18) 23% away from the 52 week high. In short, a Bear Put would be the better strategy of the two. However, we said that we are going to compare the two, so let us start with the Bear Call Spread.

Knowing that there is possible resistance at 575, we can build a Bear Call spread around that level. In the case of the Bear Call spread, we focus on the leg that needs to be sold because that leg is the driver or anchor unit. The bottom line is that we do not expect the XEO price action to go over it. The figure below shows the Time and Sales of the two calls that we will use to make up our 575/580 Bear Call on XEO.

Figure 2: XEO (at \$568.53) Bear Call 575/580 on 12/22/2011

To recap what is in Figure 2, we have created a table that explains what the spread actually is.

XEO is at \$568.53 at the close of 12/22/2011

 Buy (the first leg 2 steps OTM) BTO + 580 call @ – 1.50 Sell (the second leg one step OTM) STO – 575 call @ + 2.75 Net credit received + 1.25
Figure 3

The next figure also shows the Time and Sales of these same two call strike prices but on the morning of 12/27/2011. The last 575/580 Bear Call that day was done with 16 contracts and the premium received was greater than what a trader would have received when XEO was trading at 568.53. The same trade done when XEO was trading at 574.74 brought in \$1.95 since XEO was trading much closer to the sold 575 call.

Figure 4: (at \$574.74) Bear Call 575/580 on 12/27/2011 at 8 AM PST

The table below, Figure 5, highlights in red the reason why the premium went up; the price is closer to the sold strike so the 575 strike is now at-the-money and there is more inherent risk in selling it.

XEO is at \$574.74

12/27/2011 at 8 AM PST

 Buy (the first leg one step OTM) BTO + 580 call @ – 1.50 Sell (the second leg one step ATM) STO – 575 call @ + 3.45 Net credit received + 1.95
Figure 5

Having looked into a 575/580 Bear Call spread, let us move on to the 575/580 Bear Put spread. If we speculate that XEO will NOT close above 575 then we could look at the in-the-money (ITM) puts. The option chain in Figure 6 shows what the values were at 8 AM PST on 12/27/2011.

Figure 6: XEO Option chain

If we were to do the same option expiration cycle, December Quarterly with three days left, the sale of the 575 put would bring in 3.60 while the purchase of the 580 put would be 7.70. The total spread would cost us (7.70 – 3.60) 4.10, while the spread is five points (580 put – 575 put). In this case, we are risking 4.10 to make 0.90 cents.

XEO is at \$574.74

12/27/2011 at 8 AM PST

 Sell (the second leg) STO – 575 put @ + 3.60 Buy (the first leg) BTO + 580 put @ – 7.70 Debit – 4.10 Possible Max Profit + 0.90
Figure 7