Bearish Option Trading Strategies
Long Put – Buy Puts in a Bearish market with at least 45 days until expiration.
Entry Rules
Bearish expectations for the underlying asset.
Low Implied Volatility resulting in cheap options.
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Bear Put Spread – Buy ATM (higher strike price) Puts and sell OTM (lower strike price) Puts in moderately Bearish markets that are trending down or reaching new lows with 45 days to 90 days until expiration.
Entry Rules
Bearish expectations for the underlying asset.
Pay no more than $2 for a $5 spread, and $4 for a $10 spread, including commissions.
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Bear Call Spread – A credit spread buying OTM (higher strike price) Call and selling ATM (lower strike price) Call with 30 to 60 days until same expiration date in moderately Bearish markets.
Entry Rules
Bearish expectations for the underlying asset.
Take in a net credit of at least $3 for a $5 spread, and $6 for a $10 spread, after commissions.
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Diagonal Bear Put Spread – This trade is a combination of a Bear Put Spread and a Put Calendar Spread. Buy ATM (higher strike price) Put with 60 days or greater to expiration. Sell OTM (lower strike price) Put with at least 30 days until expiration and at least 30 days less until expiration than purchased Put. This is a good trade to do with LEAPS in combination with short-term options.
Entry Rules
Bearish expectations for the underlying asset, but you don’t expect stock price to move too quickly.
Pay no more than $4 for a $5 spread, and $8 for a $10 spread, including commissions.
Implied Volatility Skews of sold Put at least 10% greater than purchased Put.
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Bearish Put Ratio Backspread – Sell higher strike Puts and buy a greater number of lower strike Puts (1 to 2 or 2 to 3) in a market with a forward volatility skew where you anticipate a sharp price decline with increasing volatility. Look for even or net credit trades where possible on options with greater than 90 to 180 days until expiration.
Entry Rules
Strong long term Bearish expectations (possible breakdown) for the underlying asset.
Low Implied Volatility resulting in cheap options.
Enter at break even or a credit.
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