bear spread investment & finance definition
The
simultaneous purchase of a call option with a higher exercise price and the
sale of an option with a lower exercise price.
A bear spread also can be created by the simultaneous purchase of a put option
with a higher exercise price and the sale of a put option with a lower exercise
price. A trader who sets up a bear spread expects prices to go lower but still
wants a way to limit the amount of money spent purchasing options. A bear
spread is the opposite of a bull spread.
See bear spread in Wall Street Words
In futures and options trading, a strategy in which one contract is bought and a different contract is sold in such a manner that the person undertaking the spread makes a profit if the price of the underlying asset declines. Two contracts are used in order to limit the size of the potential loss. An example of a bear spread is the purchase of a call option and the simultaneous sale of another call option with a lower strike price and the same expiration date as the option purchased. A fall in the price of the underlying stock will tend to decrease the value of each option. Because the option sold carried a higher price than the option purchased, the investor could expect to make a profit equal to the difference between the two options if a major price decline in the stock should occur. Compare
bull spread.
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