The bear put spreads are frequently used by traders when the market is expected to fall back. Bear put spreads are a strategy whereby you purchase a put option while also writing a put option. The underlying stock is the same on both transactions. The expiration date is the same too.
What is different is the strike price on the options. You buy the same number of contracts for both put option purchases. When structured this way, the bear put spreads are called vertical spreads.
Vertical spreads are options transactions that have the same underlying asset, the same expiration month but the strike prices are different. When you create bear put spreads, you will buy the options at the two different strike prices at the same time.
Believing Prices Will Fall
The bear put spreads are implemented when you believe the price of the underlying asset will moderately decline. It is also used when buying the put without an offsetting purchase does not seem prudent and you want to spread your risk some. When you believe the market will be a true bear market and will fall significantly then the put option may be a better choice.
The hedging in the bear put spreads comes from the fact that the cost of buying the put with the higher strike price will be reduced by an offset of premium obtained from the buyer of the put you write at a lower strike price. The profit is calculated by taking the difference between the strike prices and reducing that number by the net debit. The debit is difference in premiums.
Filed under Option Trading Strategies by on May 29th, 2011. Comment. 
A synthetic short call strategy is just one of several possible synthetic option constructions you can consider when options trading. In this particular strategy you would combine a short stock position with a short put that has the same stock as the underlying asset. Since one put represents 100 shares, you would have to short 100 stock shares and sell 1 at-the-money put.
The maximum profit you can make on a synthetic short call is equal to the premium received less any broker commissions paid. There is unlimited loss potential with the loss equal to the market price of the stock minus the sale price of the put underlying asset less the premium plus the commissions paid.
Variety of Synthetic Positions
As mentioned, the synthetic short call is just one type of synthetic position. They are called synthetic because the construction is made up of stocks and options rather than options and options. The goal is to create the same payoff conditions with the synthetic positions as you would with the implementation of a standard options strategy.
In addition to the synthetic short call there is the synthetic short put, synthetic long call, synthetic long put, synthetic covered call and others. The synthetic short call position and the other synthetic positions can be used to enhance a trading portfolio.
The most commonly used synthetic position is the synthetic long call. In this position, the stock is matched with a put option. The synthetic strategies are considered to be advanced strategies.
Filed under Option Trading Strategies by on May 22nd, 2011. Comment.
When traders take short positions they have assumed an obligation to sell an underlying asset according to the terms of the option contract. The option seller must sell when the option is exercised by the option buyer.
Short positions refer to writing options and agreeing to provide futures contracts for stock or a commodity. The contract will contain the strike price and the expiration date. When the option holder (person or business buying the option) decides to exercise the option, the writers of short options must close the position by providing what the contract says.
The short call is an obligation to sell. A short put is an obligation to buy. Short options are a bit frightening to option investor newbies. It is easier to accept the concept of long positions as opposed to short positions because going short seems to be the equivalent of being forced to sell your stock.
Short options are often not exercised because there is time value in them until the expiration date. The option holder can sell the option for additional premium even if the option is in-the-money. But even if the short options are exercised, you will earn profit equal to the intrinsic value.
If you are entering the options market, it is important to understand both sides of trading – short options and long options. There are short calls and short puts just like there are long calls and long puts. Each option strategy works best in particular market conditions. That is why you must learn to form an opinion about the direction the market will take.
Filed under Option Trading Strategies by on May 8th, 2011. Comment.