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Bull and Bear Spreads
Bull and bear spreads are two common strategies used in financial risk management to take advantage of changes in the market.
A bull spread is a strategy used by traders who believe that the price of an underlying asset will increase in the future. This strategy involves buying a call option at a lower strike price and simultaneously selling a call option at a higher strike price. The profit potential for a bull spread is limited, but so is the potential loss.
On the other hand, a bear spread is a strategy used by traders who believe that the price of an underlying asset will decrease in the future. This strategy involves buying a put option at a higher strike price and simultaneously selling a put option at a lower strike price. The profit potential for a bear spread is also limited, but so is the potential loss.
Both bull and bear spreads are considered to be relatively low-risk strategies since they limit the potential loss. However, they also limit the potential profit, so traders must carefully consider their risk appetite and market expectations before implementing these strategies.
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