What constitutes a "bearish spread"?

What constitutes a "bearish spread"?

• A. Buying one call option at a low strike price
• B. Selling one call option and buying another call at a higher strike
• C. Buying a higher strike option and selling a lower strike option
• D. Engaging in a long position on the underlying asset

Answer: (C)

A bearish spread is a strategy that anticipates a decline in the price of the underlying asset. In this context, the correct identification of a bearish spread is centered around the actions of buying a higher strike option while simultaneously selling a lower strike option. When you buy a higher strike option, you are essentially purchasing the right to sell the underlying asset at that elevated price, which can be beneficial if the market moves downward as anticipated. Simultaneously, selling a lower strike option generates income, offsetting some of the costs associated with the strategy. This combination effectively creates a limited-risk, limited-reward scenario where the maximum profit occurs if the market declines sharply below the lower strike price. The rationale behind this strategy is that it profits from the narrowing of price differences between the sold lower strike option and the bought higher strike option, especially in a bearish market. Thus, this strategy stands out as an effective means of taking advantage of anticipated downward movements in the asset’s price.

A bearish spread is a strategy that anticipates a decline in the price of the underlying asset. In this context, the correct identification of a bearish spread is centered around the actions of buying a higher strike option while simultaneously selling a lower strike option.

When you buy a higher strike option, you are essentially purchasing the right to sell the underlying asset at that elevated price, which can be beneficial if the market moves downward as anticipated. Simultaneously, selling a lower strike option generates income, offsetting some of the costs associated with the strategy. This combination effectively creates a limited-risk, limited-reward scenario where the maximum profit occurs if the market declines sharply below the lower strike price.

The rationale behind this strategy is that it profits from the narrowing of price differences between the sold lower strike option and the bought higher strike option, especially in a bearish market. Thus, this strategy stands out as an effective means of taking advantage of anticipated downward movements in the asset’s price.