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BEARISH OPTIONS STRATEGIES 2

WELCOME TO FXDD’S BEARISH OPTIONS STRATEGY GUIDE

INTRODUCTION

Bearish options strategies are options trading strategies that are designed to allow traders to profi t when an exchange rate trends downward or depreciates. For FX traders, the only way to profi t when an exchange rate depreciates is to short the currency pair. Shorting the currency pair exposes traders to unlimited risk should the exchange rate rise instead of fall, and it also requires a signifi cant margin requirement.

Bearish options strategies overcome these issues by having more than just one way of profi ting from the same drop in exchange rate. Some bearish options strategies, however, require no margin and have limited risk. By using bearish options strategies, traders uncover a wide variety of ways to profi t when a currency pair depreciates.

This guide will detail a full list of bearish options strategies while discussing their mechanisms and reasons they work. These strategies can be helpful ways to invest or leverage existing positions for traders with a bearish market sentiment.

The information contained within is purely for education purposes and must not be construed as to indicate any kind of investment advice.

HIGH RISK WARNING: Before you decide to trade either foreign currency (“Forex”) or options, carefully consider your investment objectives, experience level, and risk tolerance. Over-the-counter leveraged Forex spot trading (“spot trading”) and options trading (“options trading”) both carry high levels of risk that may not be suitable for all investors. Educate yourself on the risks associated with spot and options trading, and seek advice from an independent fi nancial or tax advisor if you have any questions. With spot trading, you could lose some or all of your initial investment; do not invest money that you cannot afford to lose. Leverage, offered as part of spot trading, creates additional risk and loss exposure. With options trading, you could not only lose all of your initial investment, but the potential to lose money is potentially unlimited when you write an option. Purchasers and sellers of Forex options should familiarize themselves with the type of option (i.e., put or call) that they contemplate trading and the associated risks. You should calculate the extent to which the value of the options must increase for your position to become profi table, taking into account the premium paid, other transaction costs, if any, and rate of premium/time decay.


BEFORE YOU GET STARTED

Practice Accounts.

Test these strategies risk-free with an FXDD Options Trader demo. Register now for your free practice account at www.fxdd.com/mt.

FXDD Options Trader

· Completely customizable

· Downloadable or Web-based

· Built-in strategy optimizer

· Risk manager simulator

· Trade spot FX or FX options

Visit our YouTube channel for platform tutorials and basic education.

Watch Videos: www.youtube.com/fxddglobal


COVERED PUT

DESCRIPTION & TIPS

This strategy consists of selling or going short the underlying and writing put options in the equivalent amount. The short put pays for a small upside “cushion” in the event the underlying currency appreciates. MAX GAIN: Spot Entry Rate -

Strike Price + Premium Received

MAX LOSS: Unlimited

DIFFICULTY: Beginner

OUTLOOK: Bearish

RISK LEVEL: High

EXAMPLE: Sell EURUSD @ 1.3450Sell Put @ 1.34


NAKED CALL

DESCRIPTION & TIPS

This strategy consists of shorting a call.

MAX GAIN: Premium Received

MAX LOSS: Unlimited


OUTLOOK: Bearish

RISK LEVEL: High

EXAMPLE: Sell Call @ 1.34


LONG PUT

DESCRIPTION & TIPS

This strategy consists of buying a put.

MAX GAIN: Unlimited

MAX LOSS: Net Premium Paid


OUTLOOK: Bearish

RISK LEVEL: Low

EXAMPLE: Buy Put @ 1.35


LONG PUT CALENDAR SPREAD

DESCRIPTION & TIPS

This strategy consists of shorting one put option and being long a second put option with a more distant expiration. This strategy profi ts the most on a bullish or neutral move on the near month and a bearish move on the far month.

MAX GAIN: Strike Price - Net Premium Paid



OUTLOOK: Bearish

RISK LEVEL: Low

EXAMPLE: Sell Put March @ 1.35Buy Put April @ 1.35


PROTECTIVE PUT

DESCRIPTION & TIPS

This strategy consists of longing a put added to a long underlying spot position to insure the position’s value. The choice of strike prices determines where the downside protection “kicks in.” If the underlying stays strong, the investor still gets the benefi t of upside gains. But if the underlying falls below the strike, as originally feared, the investor has the benefi t of several choices.

MAX GAIN: Unlimited

MAX LOSS: Premium Paid


OUTLOOK: Bearish

RISK LEVEL: Low

EXAMPLE: Buy EURUSD @ 1.3450, Buy Put @ 1.34, Current EURUSD @ 1.33


SYNTHETIC LONG PUT

DESCRIPTION & TIPS

This strategy consists of shorting the underlying and buying a call.

MAX GAIN: Spot Entry Rate - Market Rate - Premium Paid

MAX LOSS: Spot Entry Rate -Call Strike + Net Premium Paid


OUTLOOK: Bearish

RISK LEVEL: Low

EXAMPLE: Sell EURUSD @ 1.35 Buy Call @ 1.36


SHORT HEDGE

DESCRIPTION & TIPS

This strategy consists of shorting the underlying and buying a call.

MAX GAIN: Spot Entry Rate - Market Rate - Premium Paid

MAX LOSS: Spot Entry Rate -Call Strike + Net Premium Paid


OUTLOOK: Bearish

RISK LEVEL: Medium

EXAMPLE: Sell EURUSD @ 1.35Buy Call @ 1.36


BEAR CALL SPREAD

DESCRIPTION & TIPS

This strategy contains two calls with the same expiration but different strikes. The strike price of the short call is below the strike of the long call. This strategy is a net credit spread. MAX GAIN: Net Premium Received

MAX LOSS: High Strike -Low Strike - Net Premium Received

DIFFICULTY: Intermediate

OUTLOOK: Bearish

RISK LEVEL: Medium

EXAMPLE: Sell Call @ 1.35 Buy Call @ 1.3750


BEAR PUT SPREAD

DESCRIPTION & TIPS

This strategy contains two puts with the same expiration but different strikes. The strike price of the short put is below the strike of the long put. This strategy is a net debit spread. MAX GAIN: High Strike -

Low Strike - Net Premium Paid



OUTLOOK: Bearish

RISK LEVEL: Low

EXAMPLE: Sell Put @ 1.3250Buy Put @ 1.3550


LONG RATIO PUT SPREAD

DESCRIPTION & TIPS

This strategy consists of shorting one put and being long two puts of the same expiration but with a lower strike. This strategy is best used when looking for a sharp bearish move in price or an increase in volatility. MAX GAIN: Low Strike -

(High Strike - Low Strike) - Net Premium Paid

MAX LOSS: High Strike -Low Strike - Net Premium Paid


OUTLOOK: Bearish

RISK LEVEL: Medium

EXAMPLE: Sell Put @ 1.36Buy 2 Puts @ 1.35


BEAR SPREAD SPREAD

DESCRIPTION & TIPS

This strategy is the combination of a bear call spread and a bear put spread. All options must be the same expiration. Typically, the call strikes are above and the put strikes below the current level of the underlying pair. A key part of the strategy is to initiate the position at even money, so the cost of the put spread should be offset by the proceeds from the call spread.

MAX GAIN: High Put Strike -Low Put Strike - Net Premium Paid

MAX LOSS: High Call Strike -Low Call Strike - Net Premium Paid

DIFFICULTY: Advanced

OUTLOOK: Bearish

RISK LEVEL: Medium

EXAMPLE: Buy Call @ 1.36Sell Call @ 1.35Current EURUSD @ 1.34

Buy Put @ 1.33Sell Put @ 1.32


CONTACT INFORMATION

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