Which bear spread strategy is better? Bear call Spread or Bear Put Spread?
This is a long debatable and confusing question because the purposes of both the bear spread strategies are same.
The trader may use any of these strategies if he is expecting that the market may go down (moderately bearish) in near term.
Although the purpose and pay-off graph of both the strategies are same but there are some fundamental differences between two. The most important difference between the two is that the Bear Call Spread is a credit spread and it brings money into the trader’s account. Whereas, the Bear Put Spread is a debit spread and it costs the trader to buy it.
The bear call strategy consists of 1 OTM call long and 1 ITM call short whereas bear put spreads can be implemented by buying an in-the-money put option and selling an out-of-the-money put option of the same underlying security with the same expiration date.
Now, you may have one question that what is the right strategy for trading?
Well, it depends on some criteria, like- the implied volatility, time to expiry and differences between maximum losses between two strategies. Let me explain one by one.
As a trader, you may face two situations of implied volatility, e.g.- high implied volatility or low implied volatility relative to their historic volatility.
If implied volatility is relatively high, it may be better to be in a net credit position. Hence, bear call spread will be a better option here.
Alternatively, if implied volatility is low, a net debit position i.e. bear put spread will be more attractive.
Time to expiry
: If there is longer time for option expiry then credit spread is always beneficial because you can make more profit from time value. So, if there is more than 30 days of option expiry while keeping other things constant then always choose the bear call spread option for trade.
Maximum Profit and loss:
Calculate the maximum profit and loss amount before opening the trade of both the strategies. Always look for the trade which has less amount of maximum loss. In case the trade did not go in favour of you then the loss amount will be less. Of-course, you can make adjustment of the trade at any time before closing the trade.
In conclusion, I would like to say that if you are unable to decide which strategy will be better under certain circumstances then my recommendation is to select the bear call spread strategy. Because bear call strategy is a credit spread and you can make money even the stock remains stagnant at the time of expiry because of decay of time value.