Modeling A Bear Spread Using Python

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:
    1. Buying of a European put option with one strike price (K1)
    2. 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

# 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:

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

-

 


Copyright 2022 © pythontic.com