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EducationalOctober 8, 2021

Reducing Crypto Risk Profiles With A Bear Put Spread - Here’s All You Need To Know

Shubham Goyal
Product Specialist
October 8, 2021

With the great crypto bull run of 2021 seemingly coming to an end, crypto investors all around the world are looking for ways to profit off this decline in prices. Recently, one of the ways traders attempted to profit from the downward price movement of crypto is by attempting a highly risky manoeuvre to short Bitcoin in the short run and ended up getting squeezed, much similar to what we saw during the whole Gamestop saga. Traders, expecting Bitcoin’s price to fall below $30,000, attempted to short Bitcoin, and when the prices rose above the $40,000 mark, they were forced to liquidate heavily.

While it is valid to have a short position on an asset, it is inherently important to reduce risk profiles while attempting a short. Straight shorting an asset is extremely risky and could theoretically lead to unlimited losses.

Thanks to Delta’s Bear Put Spreads, you will be able to reduce your risk profile and profit off moderately declining markets.

What is a Bear Put Spread in Crypto Trading?

A Bear Put Spread in the crypto world that you find on the Delta Exchange acts exactly like its traditional counterpart. It is a type of options strategy utilized by traders expecting a moderate/large decline in the price of the underlying crypto and is looking to reduce the cost of holding the options trade.

A bear put spread relatively simple to achieve – the trader purchases put options while selling the same number of puts on the same expiration date at a lower strike price. The maximum a bear put spread can earn can be calculated as follows:

Difference between strike prices – cost of options purchased + cost of options sold

In summary, A bear put is best used by a bearish crypto trader looking to maximise profits while minimising the risk of loss. The maximum amount of losses by opting for a bear put is limited to the net cost of the options purchased.

If the term “options” is new to you, and you’re just beginning on the journey of crypto trading, we’ve published an extensive guide on everything you need to know about crypto options and the different strategies you can execute using options.

Bear Put Spread in Crypto: An Example With Numbers

Suppose the price of an imaginary crypto, VKR, is $70. Your technicals show that in a period of one month, there is a very good chance the price falls below the $30 dollar mark. You can take advantage of your prediction, by purchasing an in the money $70 put for say, $5, and sell one $30 put for $3. If things go wrong, and the prices increase to $75, your losses will be limited to $2 ($5 – $3). However, if your prediction turns out to be right, and it does fall below $30 you stand to gain $38 ($70-$30-$5+$3)

Benefits and Negatives Of Bear Put Spreads

The benefits offered by bear put spreads are relatively straightforward. For one, they are less riskier than straight shorts, as the losses are limited to the amount you spend purchasing the options, and works wonders in a bearish market. Bear Put spreads allow you to participate in the price action without having to invest much capital like most derivatives allow you to do.

However, this does come with some negatives. For instance, along with the losses, the profits are also limited and would be detrimental in a climbing market. Even in the case of bear markets, if the price continues to fall below the strike price, you won’t be able to participate in further price movements. For instance, if the price falls to $20 – your profit would still be limited to $38, and not a penny more.

Despite the limited profits, the balance between risk and reward that a bear put spread offers makes it extremely alluring for traders looking to speculate in the short term negative price movements. Check out the Delta Exchange website for a wide range of bear put spreads that you can use to your advantage now!

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