How to Create a Bear Spread Position on Robinhood

If you're a trader who wants to implement a bear spread but Robinhood only allows you to sell call options on stocks you already own, there are alternative options available. This article will explore how you can achieve a bear spread position through vertical spreads or by finding another broker that allows spread orders.

Understanding Bear Spreads

A bear spread is a type of options trading strategy designed to profit from a decrease in the price of an underlying stock or security. It can be constructed using call options, put options, or both in a combination that maximizes profits when the market moves against the trader's expectation.

Bear Call Spread

A bear call spread involves buying a call option with a higher strike price and selling a call option with a lower strike price at the same expiration date. This strategy is beneficial if you believe the underlying stock will not increase significantly but may not decrease in value. Here's an example:

Buy a Call at SP x: This is the lower strike price, which you purchase to limit your risk. Sell a Call at SP xy at net credit: This is the higher strike price, which you sell to profit from the potential increase in the underlying stock price.

This strategy is typically used when the current price of the underlying instrument is lower than the higher strike price (x).

Bear Put Spread

A bear put spread, on the other hand, involves buying a put option with a lower strike price and selling a put option with a higher strike price. This strategy is beneficial if you believe the underlying stock will not decrease significantly but may not increase in value. Here's an example:

Buy a Put at SP a: This is the lower strike price, which you purchase to limit your risk. Sell a Put at SP a-b at net debit or better: This is the higher strike price, which you sell to profit from the potential decrease in the underlying stock price.

This strategy is typically used when the current price of the underlying instrument is higher than the lower strike price (a).

Alternative Strategies: Vertical Put Spreads

When Robinhood restricts you from selling call options unless you already own the stock, you can use a vertical put spread to achieve a similar bearish outlook. A vertical put spread involves buying a put option with a higher strike price and selling a put option with a lower strike price at the same expiration date. This strategy has a net debit or credit and requires the trader to initially pay a premium.

Example: Instead of selling the March 30-35 call spread for $3, you can buy the March 35-30 put spread for $2. This effectively creates a similar bearish scenario where you benefit if the stock price does not rise above the lower strike price (30).

Implementation on Robinhood

If Robinhood offers spread orders and you have approval to do them, it's recommended to leverage this functionality. However, if Robinhood does not offer these capabilities or you don't have approval, consider finding another broker that supports bear spread orders. Here are a few brokers to consider:

E*TRADE: Offers a variety of spread order types and has clearance for most traders to open accounts. Interactive Brokers: Known for low fees and a wide range of options for trading spreads. Thinkorswim: Offers tools for executing advanced order types, including spreads.

Whether you decide to stick with Robinhood or move to another broker, it's important to understand the risks and rewards associated with each strategy before executing a trade.

Conclusion

In conclusion, creating a bear spread position when Robinhood restricts you from selling call options can be achieved through vertical put spreads or by switching to another broker that supports spread trading. Understanding the mechanics and risks of each strategy will help you make informed decisions and maximize your profits.

By exploring these alternative methods, you can expand your trading toolkit and adapt your strategies to different market conditions.