Option Strategies

Bear Put Spread

Introduction

Bear put spread, also known as short put spread, consists of buying an ITM put and selling an OTM put. Both puts have the same underlying Equity and the same expiration date. The OTM put serves as a hedge for the ITM put. The bear put spread profits from a decline in underlying asset price.

Implementation

Follow these steps to implement the bear put spread strategy:

  1. In the Initialize method, set the start date, end date, cash, and Option universe.
  2. private Symbol _symbol;
    
    public override void Initialize()
    {
        SetStartDate(2017, 2, 1);
        SetEndDate(2017, 3, 5);
        SetCash(500000);
    
        var option = AddOption("GOOG", Resolution.Minute);
        _symbol = option.Symbol;
        option.SetFilter(universe => universe.IncludeWeeklys()
                                             .Strikes(-15, 15)
                                             .Expiration(TimeSpan.FromDays(0), TimeSpan.FromDays(31)));
    }
    def Initialize(self) -> None:
        self.SetStartDate(2017, 2, 1)
        self.SetEndDate(2017, 3, 5)
        self.SetCash(500000)
    
        option = self.AddOption("GOOG", Resolution.Minute)
        self.symbol = option.Symbol
        option.SetFilter(self.UniverseFunc)
    
    def UniverseFunc(self, universe: OptionFilterUniverse) -> OptionFilterUniverse:
        return universe.IncludeWeeklys().Strikes(-15, 15).Expiration(timedelta(0), timedelta(31))
  3. In the OnData method, select the expiration and strikes of the contracts in the strategy legs.
  4. public override void OnData(Slice slice)
    {
        if (Portfolio.Invested) return;
    
        // Get the OptionChain
        var chain = slice.OptionChains.get(_symbol, null);
        if (chain.Count() == 0) return;
    
        // Get the furthest expiry date of the contracts
        var expiry = chain.OrderByDescending(x => x.Expiry).First().Expiry;
        
        // Select the put Option contracts with the furthest expiry
        var puts = chain.Where(x => x.Expiry == expiry && x.Right == OptionRight.Put);
        if (puts.Count() == 0) return;
    
        // Select the ITM and OTM contract strike prices from the remaining contracts
        var putStrikes = puts.Select(x => x.Strike).OrderBy(x => x);
        var itmStrike = putStrikes.Last();
        var otmStrike = putStrikes.First();
    def OnData(self, slice: Slice) -> None:
        if self.Portfolio.Invested: return
    
        # Get the OptionChain
        chain = slice.OptionChains.get(self.symbol, None)
        if not chain: return
    
        # Get the furthest expiry date of the contracts
        expiry = sorted(chain, key = lambda x: x.Expiry, reverse=True)[0].Expiry
        
        # Select the put Option contracts with the furthest expiry
        puts = [i for i in chain if i.Expiry == expiry and i.Right == OptionRight.Put]
        if len(puts) == 0: return
    
        # Select the ITM and OTM contract strike prices from the remaining contracts
        put_strikes = sorted([x.Strike for x in puts])
        otm_strike = put_strikes[0]
        itm_strike = put_strikes[-1]
  5. In the OnData method, call the OptionStrategies.BearPutSpread method and then submit the order.
  6. var optionStrategy = OptionStrategies.BearPutSpread(_symbol, itmStrike, otmStrike, expiry);
    Buy(optionStrategy, 1);
    option_strategy = OptionStrategies.BearPutSpread(self.symbol, itm_strike, otm_strike, expiry)
    self.Buy(option_strategy, 1)

    Option strategies synchronously execute by default. To asynchronously execute Option strategies, set the asynchronous argument to Falsefalse. You can also provide a tag and order properties to the Buy method.

    Buy(optionStrategy, quantity, asynchronous, tag, orderProperties);
    
    self.Buy(option_strategy, quantity, asynchronous, tag, order_properties)
    

Strategy Payoff

The bear put spread is a limited-reward-limited-risk strategy. The payoff is

$$ \begin{array}{rcll} P^{OTM}_T & = & (K^{OTM} - S_T)^{+}\\ P^{ITM}_T & = & (K^{ITM} - S_T)^{+}\\ P_T & = & (P^{ITM}_T - P^{OTM}_T + P^{OTM}_0 - P^{ITM}_0)\times m - fee\\ \end{array} $$ $$ \begin{array}{rcll} \textrm{where} & P^{OTM}_T & = & \textrm{OTM put value at time T}\\ & P^{ITM}_T & = & \textrm{ITM put value at time T}\\ & S_T & = & \textrm{Underlying asset price at time T}\\ & K^{OTM} & = & \textrm{OTM put strike price}\\ & K^{ITM} & = & \textrm{ITM put strike price}\\ & P_T & = & \textrm{Payout total at time T}\\ & P^{ITM}_0 & = & \textrm{ITM put value at position opening (debit paid)}\\ & P^{OTM}_0 & = & \textrm{OTM put value at position opening (credit received)}\\ & m & = & \textrm{Contract multiplier}\\ & T & = & \textrm{Time of expiration} \end{array} $$

The following chart shows the payoff at expiration:

Strategy payoff decomposition and analysis of bear put spread

The maximum profit is $K^{ITM} - K^{OTM} + P^{OTM}_0 - P^{ITM}_0$. If the underlying price is below than the strike prices of both put Option contracts, they are worth $(K - S_T)$ at expiration.

The maximum loss is the net debit you paid to open the position, $P^{OTM}_0 - P^{ITM}_0$. 

If the Option is American Option, there is a risk of early assignment on the sold contract.

Example

The following table shows the price details of the assets in the algorithm:

AssetPrice ($)Strike ($)
OTM put4.60767.50
ITM put40.00835.00
Underlying Equity at expiration829.08-

Therefore, the payoff is

$$ \begin{array}{rcll} P^{OTM}_T & = & (K^{OTM} - S_T)^{+}\\ & = & (767.50-829.08)^{+}\\ & = & 0\\ P^{ITM}_T & = & (K^{ITM} - S_T)^{+}\\ & = & (835.00-829.08)^{+}\\ & = & 5.92\\ P_T & = & (P^{ITM}_T - P^{OTM}_T + P^{OTM}_0 - P^{ITM}_0)\times m - fee\\ & = & (5.92-0+4.60-40.00)\times100-1.00\times2\\ & = & -2950\\ \end{array} $$

So, the strategy losses $2,950.

The following algorithm implements a bear put spread strategy:


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