A trader who is "bearish" is someone who believes the price of the underlying asset will fall. Which of the following option positions are suitable for bearish sentiment over the underlying asset?

Question

BlackTom AI · Accepted Answer

Long put profit increases as the underlying falls, so it is a bearish position; selling calls also benefits from a falling or stable underlying because the seller keeps the premium if the call expires out of the money.

1) Relevant knowledge points and formulas
- Call option (long) payoff at expiration: payoff = max(S − K, 0) − premium. Profits when S rises above K.
- Put option (long) payoff: payoff = max(K − S, 0) − premium. Profits when S falls below K.
- Short call payoff: payoff = premium − max(S − K, 0). Seller profits if S ≤ K (call expires worthless).
- Short put payoff: payoff = premium − max(K − S, 0). Seller faces losses if S falls well below K.

2) Step-by-step reasoning
- Long call (a): payoff increases with S; this is bullish, not bearish.
- Short call (b): if S falls or stays below K, max(S − K, 0) = 0, so seller keeps premium → beneficial when underlying falls → bearish stance.
- Long put (c): payoff increases as S decreases (K − S grows) → directly profits from a decline → bearish stance.
- Short put (d): if S falls below K, seller suffers (must buy at K) → short put is effectively bullish or neutral-to-bullish (seller wants S to stay ≥ K).

3) Intermediate calculations (symbolic)
- Long put: payoff = max(K − S, 0) − premium. If S decreases, K − S increases → payoff increases.
- Short call: payoff = premium − max(S − K, 0). If S decreases so S ≤ K then payoff = premium (maximised for seller).

4) Why the correct answer is correct
Because both short calls and long puts generate gains (or avoid losses) when the underlying price falls: long put values rise with declines; short call sellers profit when calls expire worthless as price falls.

5) Why other choices are incorrect
- a (long call) is bullish.
- d (short put) is bullish/risk of loss if price falls.
- Combinations e, f, g mix bullish and bearish positions or are both bullish.

6) Conclusion
Therefore the bearish strategies are short call (b) and long put (c). The correct choice is h (Both (b) and (c) are bearish strategies), matching the provided answer.

A trader who is "bearish" is someone who believes the price of the underlying asset will fall. Which of the following option positions are suitable for bearish sentiment over the underlying asset?单项选择题

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