Sunday, August 19, 2012

Bearish Option Plays

Bearish Limited Risk
Long Put
  • Easy to execute and manage
  • The delta of a put tells you your exposure to changes in the stock
  • The delta of a put will change with stock price movement and the passage of time
  • Don't forget about time decay (negative theta)
  • Keep in mind that volatility of the underlying and fluctuations in implied volatility (supply and demand for premium) affect option prices

Put Back Spread
  • Long more lower strike puts and short higher strike put at same expiration
  • Like a long put, it has unlimited downside profit potential with limited risk
  • At expiration, the stock needs to be significantly below the long strike to make money
  • This position has net long options, and is usually long volatility (vega)
  • Be aware that a backspread can be initiated for a debit (pay for it) or credit (receive money for it)
  • The potential liability is the difference between the strikes

Bear Vertical (long put vertical or short call vertical)
  • Long higher strike put (call) and short lower strike put (call) at same expiration
  • The bigger the difference between the strikes, the bigger the potential profit. And also the bigger the cost
  • Your maximum loss and profit are limited
  • Generally speaking, it's an inexpensive way to play the downside in a stock or index
  • It is a conservative way to get short, less expensively, and with limited risk.

Long Lower Strike Butterfly
  • Relatively inexpensive option strategy that has limited risk and limited profit potential
  • The closer a butterfly is to expiration, the more it will react to changes in the stock price
  • A strategy used by professional traders for years because of its protective characteristics
  • For a long butterfly, you want the stock to drop to the middle strike

Long Lower Strikes Time Spread
  • Long back month option and short front month option at the same strike
  • Time spreads have limited risk and limited profit potential
  • Relatively low cost position with no margin required
  • Be aware that implied volatility can change at different rates in each month
  • This spread works best if the stock moves down to the strike price slowly, allowing the premium of the short call to erode at a quicker rate

Bearish Unlimited Risk

Short Stock
  • Sell short, close your eyes, and pray that it tanks – and don't forget that you owe the dividends
  • Check the hard-to-borrow list before you short a stock
  • Short stock requires the sale to occur on an up-tick or zero-plus tick in the stock
  • Isolate your speculation – and you may find an option position that has more desirable risk characteristics than short stock

Short Combo
  • "Synthetically" short stock
  • Long put and short call at same strike and expiration
  • Has the same risk exposure as short stock, with interest and dividends built into the combo price
  • Remember: there is no short stock rebate for retail clients
  • A short combo is a way of getting past the down-tick ruleTemplate for shorting stock
  • Unlike short stock, short combos expire, and unless it is exactly at the money, short stock will be the result of the put exercise or the call assignment.

Short Semi-Stock (off strike combo)
  • Similar to short combo, but has smaller negative delta
  • Long lower strike put and short higher strike call at same expiration
  • The position is generally initiated as premium-neutral but that can change quickly as the stock price moves
  • Requires less margin than either short stock or same-strike combo

Short Call
  • Potential profit is limited to the price of the call
  • Risk is unlimited
  • Generally requires less margin than shorting stock

Call Ratio Spread for Credit
  • Long lower strike call and short more higher strike calls at same expiration
  • The most common ratio between short and long is 2:1
  • Ratio spreads have unlimited upside risk – monitor your position carefully
  • At expiration, greatest profit at the higher strike price
  • Because the position is net short options, there is an increased volatility risk

No comments: