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12) You feel that the stock market has once again risen unjustifiably
12) You feel that the stock market has once again risen unjustifiably. To protect yourself, you decide to acquire a bear spread from call options. Is this the right strategy for you at this time? If so, how would you construct it? If not, explain why not.
Expert Solution
12) Yes, bear spread from call options can provide some protection against market falling.
We construct the bear call spread by selling a call option and simultaneously buying a higher strike price call option. We receive a credit for this strategy. We receive premium for selling the call option, which is higher than the premium we pay for buying a higher strike call option.
This strategy provides a limited protection against the fall in market. The protection it provides is limited to the credit we received.
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