Bear diagonal spread
| Range | Value |
|---|---|
Market expectation | Falling prices |
Construction | Call short with strike price E1 (shorter term) |
Profit potential | Limited |
Risk of loss | Limited |
Time effect | Positive |
Volatility effect | (Slightly) Positive |
Market expectation
A bear-diagonal spread consists of options of the same type, but with different terms and strike prices.
Similar to the bear price spread, you are speculating on falling prices here.
Construction
Bear diagonal spreads with calls consist of a call short with strike price E1 and a shorter term and a call long with strike price E2 (>E1) and a longer term.
Bear diagonal spreads with puts consist of a put long with strike price E2 and a longer term and a put short with strike price E1 (<E2) and a shorter term.
Profit potential
Bear diagonal spreads have limited profit potential. The profit is maximized if the price of the underlying is quoted at E1 at the end of the shorter term.
Risk of loss
The maximum loss of a bear diagonal spread is limited.
Time effect
As the loss in fair value accelerates as the remaining term decreases and the shorter-term option is sold, a positive fair value arises in the middle price range.
Volatility effect
The volatility effect of the overall position is largely neutral, but as the purchased option has a longer term, it is more strongly influenced by changes in volatility. This creates a slightly positive effect.