Bull/bear vertical option breakevens
Nobody makes perfect trading predictions 100% of the time. Maybe you’ve had a bad run lately. Or maybe you’ve been on a huge roll of profitability. But one thing’s for sure: You need to adapt to market conditions. Sometimes, you’ll come in like a bull if you feel the price of a market asset will appreciate, and sometimes, you’ll be more bearish, with the opposite sentiment. In either scenario, there exists a breakeven strategy that investors like to use; a way to maximize your profits, and limit losses. Let’s have a look at each one.
First, there’s the bull vertical breakeven: Again, if you feel that a stock price is going to increase, this is where your head will be. However, you would follow this strategy if you’re just not certain, and you want to limit the downside potential that could come from a wrong prediction. In this case, the max profit here would be the spread between the call strikes, subtracting the net premium of the contracts. And your breakeven would be the long call strike plus the purchase price.
Conversely, there’s the bear vertical breakeven: This is what you’d do if you’re feeling a little bearish, but you still want to max your profit, while limiting possible losses if you’re wrong. Here, your breakeven would be the long call strike minus the spread purchase price.
If this still sounds a little bit confusing, it’s only because it is. To better understand, your best bet is to actually get some hands-on experience doing these types of trades, even if it’s for small money in the beginning. I only have a good understanding because I’ve done these kinds of trades so many times already, both when I’m feeling bullish, and also when I’m feeling bearish. With a little more experience under your belt, I have no doubt that you’ll be a seasoned money maker in no time!