It is an option strategy that seeks maximum profit when the price of the underlying security or commodity declines.
The strategy involves simultaneous purchase and sale of options which should have the same date of expiry.
It is used by futures traders who intend to profit from the decline in commodity prices while limiting potentially damaging losses. A bear spread is created through the simultaneous purchase and sale of two of the same or closely related futures contracts.
This is accomplished in the agricultural commodity markets by selling a future and offsetting it by purchasing a contract with an extended delivery or expiry date.
For example, in a bear call spread, you buy a call with a higher strike price and sell a call with a lower strike price. With a vertical bear put, you buy a put at a higher price and sell a put at a lower price. In either case, if you are right about the behaviour of the underlying instrument – a commodity/stock whose price you expect to fall does lose value – you could have a net profit. If you are wrong, you end up with a net loss cushioned by the income from the sale of one of the legs of the spread.
Unfortunately, options trading in commodities is not allowed in the country.