Earnings Season: Should You Buy Puts or Use Spreads for a Bearish Outlook?

Most option beginners start with single-leg option strategies because they are straightforward.

Choosing Buy Put means limited risk and controlled cost. If the stock unexpectedly surges, the maximum loss is the entire premium paid. However, unless the trend is very clear and strong, the win rate is relatively low.

Choosing Sell Call offers a higher win rate compared to buying but requires substantial margin and carries significant risk. If the stock price rises and you are forced to deliver shares, the maximum loss can be unlimited.

Deciding between Buy Put and Sell Call depends on your capital, risk tolerance, and investment habits. For those with smaller capital and lower risk appetite, being a buyer might be more suitable. For those with larger capital and willingness to risk high-cost deliveries, selling might be considered.

Both spreads reflect a bearish outlook, but they involve different types of options: one uses Calls, and the other uses Puts.

By simultaneously buying and selling options, you can offset part of the premium, reduce costs, and limit both maximum profit and loss, effectively lowering overall strategy risk.

A Bear Call Spread consists of "selling Call 1" and "buying Call 2." Call 1 and Call 2 cover the same stock, have the same contract size and expiration date, but Call 1 has a lower strike price than Call 2.

A Bear Put Spread consists of "selling Put 1" and "buying Put 2." Put 1 and Put 2 cover the same stock, have the same contract size and expiration date, but Put 1 has a lower strike price than Put 2.

Note that the maximum profit and loss for Bear Call Spreads and Bear Put Spreads are determined by the spread.

Risk: The wider the spread, the higher the potential maximum profit and loss. Therefore, choosing the spread should consider your risk tolerance and profit expectations.
Expectation: If you expect a small decline, a narrower spread is generally chosen; if you expect a large decline, a wider spread is typically chosen.
Expiration Date: Options closer to expiration require a smaller spread, while those further out require a larger spread.

For short-term options, time value decays rapidly, leading to quick overall value decay. In this case, a smaller spread means the time values of both options are closer, allowing for risk control with limited price movement.

For long-term options, time value decays more slowly, leading to slower overall value decay. Longer durations mean greater potential price movement. In this case, a larger spread allows for downside protection while retaining significant profit potential.