Overview:
- The players of the options market employ a bear spread when they consider the market is going to be bearish in the short run.
- Forming of a bear spread involves the following transactions:
- Buying of a European put option with one strike price (K1)
- Selling of a European put option with the strike price (K2) less than the strike price of transaction 1.
- When the stock price moves less than K1 there is a limited profit.
- When the stock price is between K1 and K2, there is a limited profit.
- If the stock price moves to K2 or above K2, the profit is zero. There is no loss as well.
Example: Modeling of a Bear Spread using Python
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# Python example that models a bear option spread
stockPrice = 70; K1 = 80; K2 = 90;
# Stock price goes upwards i = 0 while i < 5: stockPrice = stockPrice + 5 payoff = 0 if (stockPrice > K1 and stockPrice < K2): payoff = K2-stockPrice; elif (stockPrice <= K1): payoff = K2-K1; elif (stockPrice >= K2): payoff = 0; else: payoff = 0; print("Stock price:%2.2f"%stockPrice); print("Payoff from bull spread:%2.2f"%payoff); print("-") i = i + 1;
stockPrice = 70;
# Stock price goes downwards while i >= 0: stockPrice = stockPrice - 5; payoff = 0 if (stockPrice > K1 and stockPrice < K2): payoff = K2-stockPrice; elif (stockPrice <= K1): payoff = K2-K1; elif (stockPrice >= K2): payoff = 0; else: payoff = 0; print("Stock price:%2.2f"%stockPrice); print("Payoff from bull spread:%2.2f"%payoff); print("-") i = i -1; |
Output:
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Stock price:75.00 Payoff from bull spread:10.00 - Stock price:80.00 Payoff from bull spread:10.00 - Stock price:85.00 Payoff from bull spread:5.00 - Stock price:90.00 Payoff from bull spread:0.00 - Stock price:95.00 Payoff from bull spread:0.00 - Stock price:65.00 Payoff from bull spread:10.00 - Stock price:60.00 Payoff from bull spread:10.00 - Stock price:55.00 Payoff from bull spread:10.00 - Stock price:50.00 Payoff from bull spread:10.00 - Stock price:45.00 Payoff from bull spread:10.00 - Stock price:40.00 Payoff from bull spread:10.00 - |