Lesson 28: Bear Spread Strategy - Betting on a Mild Downturn with Limited Losses

Author: Zhang Wuji wepoets

Core logic: trading space for certainty

The essence of the bear spread strategy is to lock in the risk boundary through premium hedging. When investors expect the underlying asset to fall moderately but are unwilling to bear the unlimited risk of unilateral selling options, they can simultaneously buy high-strike options and sell low-strike options, forming a profit structure of "guaranteeing a bottom line and blocking losses".

This strategy is like "skydiving with a parachute" - it can capture downside gains while avoiding free-fall losses.

Take the US stock market as an example: if Nvidia's stock price is currently $800, and investors believe that it may fall to $750 after the earnings report, but the probability of falling below $700 is low, then you can buy a put option with an exercise price of $750 (premium $32) and sell a put option with an exercise price of $700 (premium $18), with a net cost of $14.

If the stock price drops to $730 at expiration, the high-strike option will earn $20 (750-730), while the low-strike option will be worthless, resulting in a net gain of $6 (20-14); if the stock price rebounds to $820, only $14 in premium will be lost. This feature of "making money when the stock price drops and not getting liquidated when the stock price rises" makes it a defensive counterattack tool in a volatile downward market.

Construction method: three-level risk firewall

Step 1: Identify market sentiment and volatility

Choose assets with medium to high implied volatility (IV). The U.S. stock market should pay attention to the correction of technology stocks after the earnings season, and the crypto market can capture the profit-taking market after the Bitcoin halving.

For example, if the current price of Ethereum is $2,000 and it is expected to drop to $1,700 within the next month, but there is strong support at $1,500, a strategy can be designed around this range.

Step 2: Design the strike price buffer

The high strike price is usually close to the current price (at the money or slightly out of the money), and the low strike price is set according to the expected decline. The price difference of individual US stocks is set at 5-8% of the current price, and assets with volatility exceeding 100% such as Bitcoin can be expanded to 15-20%.

For example, if the share price of Coinbase is $120, you can buy a put option with an exercise price of $115 and sell a put option with an exercise price of $100. The price difference of 12.5% covers the expected decline and reserves a safety cushion.

Step 3: Calculate costs and break-even point

Net cost = Buy option premium - Sell option premium. Breakeven point = High strike price - Net cost.

Take Bitcoin options as an example: Buy a put option with an exercise price of $62,000 (premium of $3,800), sell a put option with an exercise price of $58,000 (premium of $2,200), net cost of $1,600. The break-even point is $62,000-1,600=$60,400, and the price of the currency must fall below this point to make a profit.

Advanced skills: adapting strategies to market trends

Volatility arbitrage: When IV is high, put options are preferred to build spreads. For example, when the IV of the Nasdaq 100 index option exceeds 30%, the put option premium premium is obvious, and it is more efficient to hedge the cost by selling low strike price options.

Term strategy: Weekly contracts are suitable for short-term events in the US stock market (such as the release of CPI data), while Bitcoin quarterly contracts are more suitable for capturing macro trends.

Multi-asset hedging: Add the opposite target to the spread combination to form a hedge. For example, while holding the long position of ARKK fund, buy the S&P 500 bear market put spread combination to balance the risk with the negative correlation between technology growth stocks and the market index.

In short, the bear market spread is not a decline amplifier, but a risk controller. A true risk control master never greedily increases his bets during a sharp drop, but only calmly harvests during a rebound.

Next Issue

Tomorrow we will learn about the "Ratio Spread Strategy"

Homework

1. Actual combat deduction: Assuming that the current price of Ethereum is $2,000, buy a put option with an exercise price of $1,800 (premium of $180), and sell a put option with an exercise price of $1,500 (premium of $90). Please calculate: • Net cost and break-even point • Rate of return when the price drops to $1,900 • Maximum potential profit amount

2. Market observation: Select Bitcoin options for next month on the Deribit platform, compare the difference in cost between spread combinations where the strike price deviates by 8% and 12% from the current price, and determine which spread is more cost-effective based on the 30-day historical volatility.