A stock market investment is one of the most common and primary ways to make money. There is no one whom it doesn’t entice and excite, but only a few dare to take the risk, or rather, understand the market well to invest smartly. Options Trading is one of the ways that can be a good learning experience for you and give you a good return on investment (ROI) if you play by the rules.
What is Options Trading?
Simply put, it is a Derivative Instrument with no value of its own just like other Derivative Instruments. When the price of other monetary instruments (like underlying assets) fluctuates, the price of a Derivative Instrument gets decided on that basis. Now what is an underlying asset? These are commodities, currency pairs, indices, and stocks. When the price of these (or any of these) instruments changes, the price of derivatives gets along with it, as it is derived from the same. Under Trading Options, you can buy or sell any monetary instrument at a particular day and price, unlike Futures Trading where buying and selling is obligatory. In the previous blog, our SEBI Certified Research Analyst, Ashutosh Bhardwaj enlightened the readers about Directional Bullish Trades. Here, we will be sharing his two cents on Directional Bearish Trade.
What is Directional Bearish Trades?
Suppose you are trading in the stock market and you happen to have the skill where you can analyse the market so well that you can anticipate a further decline in the underlying monetary asset’s price. And you know how to take a much-needed position and still make a profit from a downward market movement. That is called Directional Bearish Trading which makes you a Directional Bearish Trader who can capitalise on his expectations of asset decreasing value.
Here are some common types of Directional Bearish Trades:
1. Bear (Sell) Call
When there is an expectation in the market that the price will fall, it is known as Bear Call. Investors and/or traders sell a call with a low strike price and buy a call with a high strike price. It has a limit of loss and gain, unlike other directional strategies. Its biggest advantage is that it is less volatile as compared to other trading types. For example, even if the market price increases at the end of the day, an investor with a bear call will suffer fewer losses than an investor with a call option. It gives a higher payoff at low prices. At times, the losses are also capped.
2. Bear (Buy) Put
Just like bear calls, whenever the market prices fall, bear put (or buy put) makes a profit. When an investor sells a put with a low strike price and buys a put with a high strike price, then we can say that a bear put has been created. It costs less to invest in a bear put, as compared to buying a put option that cuts down on volatility. When you buy a put option, you’re giving the buyer the ability to sell the underlying asset at a strike price. The higher the strike price, the more income he or she gets.
3. Bear Call Spread
When the trader is expecting a reasonable upsurge in the underlying asset’s price that is called a Bear Call Spread. It is a strategy of options trading with 2 call options – Number 1. Selling a call option and collecting an upfront option premium. Number 2. Buying a second call option with the same expiration date, but a higher strike price. It is one of the four fundamental vertical option spreads. As it gives upfront premium, it is also renowned as credit call spread or short call spread.
4. Bear Put Spread
We can say that it happens when a trader or investor buys one put to bank on the profit he or she is expecting from the upcoming decline in the underlying security. At the same time, he/she writes (sells) another put with the same expiry date (or day) but comparatively at a lower strike price to foster financial growth and balance the cost of buying the first put in the first place. When the market is witnessing some crucial movements that are going in another direction than your anticipation, then this strategy curtails the market risk.
5. Put Back Ratio Spread
This bearish strategy has zero risk or stumbling block and gives maximum profit from a large payoff in the underlying asset’s price. One can execute this strategy by procuring a put debit spread with a supplementary long put at the long strike. So when it comes to a put back ratio spread, it looks something like this –
- Purchase two “In the Money” (ITM) put options together.
- Sell one “Out of the Money” (OTM) or “At the Money” (ATM) put option at a comparatively lower strike price.
It will eventually help you balance the external value in the long options.
Conclusion
To know how you can make the most of these fundamental and profit maximizing strategies, get yourself enrolled in online stock market courses offered by Logical Nivesh, where our SEBI Registered Research Analyst will mentor you at every step. Register today to get started with your trading career.
