On page 331 of the book provided by the CAIA Association, the following explanation of possible unlimited losses for bear spreads is given: If prices move against the investor’s position, the bear spread faces unlimited risk, since the nearby theoretically can rise without an upper limits…
Why this is not the case with with bull spread?
Any opinions on this?
The idea is that if you are long the front month in a bull spread… The risk is limited to the case where the price falls to zero… In most cases that would be devastating to an account but it not *unlimited.
What danv said. Basically, a bull spread benefits when the price of the underlying goes up and causes loss when the price goes down…so your loss scenario is limited to the price falling to 0 since you cant have a negative price. A bear spread benefits when the price of the underlying goes down and causes loss when the price goes up…so your loss is theoretically unlimited since the price could go up infinitely (in theory).
I was a bit confused by the wording, but it is absolutely logical.