Strategy of Bear Spread
State when markets are anticipated to go down then what is the Strategy of Bear Spread?
Expert
This strategy is deployed when the investors have a bearish attitude about the market and expect that the markets would fall in the short term. To pursue this strategy, the trader takes an opposite position i.e. sells a call option with lower exercise price while buys a call option that has the higher strike price. Therefore there is a net premium inflow initially which can be expressed as the difference of the premiums of the 2 call options. Through the use of puts also, the strategy can be structured and accordingly the payoffs as well as profits from this strategy are deduced using put options. In case that puts are used, initially the strategy would lead to a net outflow of premium as the trader buys the put that has the higher exercise price (K2) and also shorts the put that has a lower strike price (K1). Since puts whose exercise prices are higher are more expensive in contrast to put options that have lower strike prices, there is a net premium outflow at the start which can be represented by -p2 + p1. Accordingly, at expiration, the value of this strategy can be expressed as:
V = max (0, K2 – ST) – max (0, K1 – ST).The profits that accrue on account of the above strategy are obtained by subtracting from the value of the strategies, the net premium outflow as shown under:
Profit = max (0, K2 – ST) – max (0, K1 – ST) – p2 + p1.In contrast to the bull spread, profits in this situation result when the prices of the stock (the underlying asset) decline. Profits from the bear spread strategy are maximized only when the short position in the put expires worthless at expiration and there is a net payoff due to the long position in the put option. This strategy has been represented in the graph below:
As can be seen from the diagram, both the profits as well as the losses are limited in this case too, like the bull spread. The only difference is that the payoff occurs only when the stock prices go down and the bearish views of the trader hold good when the options expire. It can be seen here also that the maximum loss occurs when both the options expire worthless and are out of the money and the quantum of the maximum loss is p1 – p2. On the other hand, the maximum gain that occurs can be quantified as:
Maximum profit = K2 – K1 – p2 + p1.Like the earlier case, it is essential to ensure that the differences in the strike prices of the options exceed the net premium which is paid at the onset to implement the bear strategy. In case of bear spread with calls, the profit occurs only when both the options expire worthless and this is feasible only if the stock price declines during expiration of the option.
Please assist with the attached Data Case assignment
Taurus Corporation needs a computer, which it can buy for $100,000. Taurus will depreciate the computer uniformly over its useful life of 5 years. An investment tax credit of 7% is also available, and the computer will have no residual value. Taurus plans to borrow th
Various broad research methodologies are available with which to study the development of accounting theory. a. Discuss the deductive, inductive, normative, and empirical research methods.
Task Description Length: 1000-2000 words (up to 500 words above 2000 permitted) Description: • Complete this assignment in groups of 4-5 students. • Maintain a portfolio of financial issues taken from 8 news sources. • Analyse the articles with reference to theory covered in class and h
Stock exchanges: A stock exchange provides services useful for trading, issue and redemption of shares and other securities for traders and brokers. They will also provide facility for payment of income and dividends for listed securities. Securities
Financial Analysis: It is the investigation and interpretation of financial statements and associated financial reports. Trained and certified accountants generally complete this kind of analysis. The role of a financial analyst is to
Cheever Corp stock is selling at $40 a share. Its dividend in subsequent year will be $2 a share and its β is 1.25. Crane Company has similar growth rate as Cheever. The current stock price of Crane is $55 a share, and its dividend this year is $3. The riskless r
Assume that you are a financial manager of Yuen Cheong Manufacturng Company. Due to the rising demand of product X, Yuen Cheong Manufacturng Company decides to open a new production plant in China, so it needs to take a loan of US$1 million. Bank A offers Yuen Cheong
Benefits of Cash to cash analysis: The benefits of Cash to cash analysis are as following: 1. Helps in better cash management situation thus, increasing liquidity. 2. The cash a
Identify two comparable corporations. Explain why you think they are comparable to your corporation. Earnings analysis: Do an earnings analysis of your corporation. Calculate and plot. Discover Q & A Leading Solution Library Avail More Than 1425975 Solved problems, classrooms assignments, textbook's solutions, for quick Downloads No hassle, Instant Access Start Discovering 18,76,764 1931865 Asked 3,689 Active Tutors 1425975 Questions Answered Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!! Submit Assignment
18,76,764
1931865 Asked
3,689
Active Tutors
1425975
Questions Answered
Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!!