Put Option Bear Market Strategies at Bybit

by John | May 25, 2023

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What is a Put Option?


In simple terms, a put option is a financial contract that gives the owner (buyer) the right, but not the obligation, to sell a specific asset, such as a stock or commodity, at a predetermined price (known as the strike price) within a specified period of time (until the expiration date).


Here's a simplified explanation of how a put option works:

  1. Right to sell: A put option gives the owner the right to sell the underlying asset. For example, let's say you own a put option for a specific stock.

  2. Strike price: The put option specifies a strike price, which is the price at which you have the right to sell the stock. If the stock's market price falls below the strike price, the put option can become valuable.

  3. Expiration date: The put option has an expiration date, which is the deadline by which you must exercise the option (sell the stock) if you choose to do so. After the expiration date, the option becomes worthless.

  4. Profit potential: If the stock's market price falls below the strike price before the expiration date, the put option can be profitable. You can exercise the put option and sell the stock at the higher strike price, even if the market price is lower, thus generating a profit.

  5. Limited risk: The maximum risk you face with a put option is the premium (price) you paid to purchase the option. If the stock's price rises or remains above the strike price, you may choose not to exercise the option and let it expire, in which case you would lose the premium.



In summary, a put option gives you the right to sell an asset at a predetermined price within a specific timeframe. It can be used as a hedging tool to protect against potential price declines in the underlying asset or as a speculative tool to profit from downward price movements.


Put options can also be used as a bear market strategy to profit from price declines without the risk of liquidation. 


Bybit Put Options


The Bybit Options chain shows the put options on the left hand side, note the Puts in white lettering , along with the strikes in the middle column.


Bybit Options Chain Puts




An example of the mechanics of a put trade and the result payoff follows:


A trader thinks the price of Bitcoin is going to move down sharply, there is a put on available that gives him the right to sell Bitcoin at $16,000 trading for a premium of $100 , the option expires in 2 months and Bitcoin is currently $20,000. The trader's PNL at expiry is plotted below. 


Put Option payoff Bitcoin diagram


We can calculate his PNL by inputting the option price (100) , strike price (16,000) , number of options bought (1) and input a range of strike prices to see how the PNL and return on investment changes for different ending prices. 

Put Option PNL Calculator


Bear Put Spread Strategy


The bear put spread is an options trading strategy used by investors who expect a moderate decline in the price of an underlying asset. It involves buying a put option with a higher strike price for downside protection and simultaneously selling a put option with a lower strike price to offset the cost. The strategy aims to profit from a downward move in the asset's price while limiting potential losses. The maximum profit is achieved if the price falls below the lower strike price, and the maximum loss occurs if the price rises above the higher strike price. The bear put spread offers a controlled risk-reward profile and can be employed when anticipating a moderate decline in the asset's price


We will take an example where Bitcoin is currently trading at $20,000 and a trader notices 2 put options on offer in the market. 


Option 1: Put option to sell Bitcoin at 19,000 selling for $100 

Option 2: Put option to sell Bitcoin at 18,000 selling for $60



Bitcoin Bear Spread Strategy


Bear Spread PNL Calculator




Pros of Put Options


  1. Profit from Price Declines: Put options offer the opportunity to profit from downward price movements in the underlying asset. If the market price falls below the strike price, the put option can increase in value.

  2. Limited Risk: The maximum risk with put options is the premium (price) paid to purchase the option. Investors have predefined and limited losses, which can be advantageous in managing risk.



Cons of Put Options


  1. Premium Cost: Buying put options involves paying a premium, which represents the upfront cost of the option. If the anticipated price decline doesn't occur or isn't significant enough, the premium paid for the option may be lost.

  2. Time Decay: Put options have an expiration date, and their value diminishes as time passes. If the anticipated price decline doesn't happen within the expected timeframe, the option may lose value or expire worthless.

  3. Limited Duration: Put options have a fixed expiration date. If the anticipated price decline occurs after the option expires, the investor may miss out on potential profits.

  4. Requires Correct Timing: To profit from put options, investors need to accurately predict the timing and magnitude of price declines. Incorrect timing or inadequate price movement can result in losses.





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