Bear Put Spread

Bear Put Spread

Post By - Laxmi Mahera
Review By : Rohan Sharma
Updated on : October 26, 2021

Basics Concepts – Bear Put Spread

Description - Bear Put Spread

The Bear Put is a vertical spread strategy that creates a net debit in your account.
You buy a near At the money (ATM) Put and sell a Lower strike (typically OTM) Put with the same expiration.
The net effect of the strategy is to bring down the cost and breakeven on the trade compared to simply buying the long Put.
The Bear Put Spread requires a Bearish outlook because you will make a profit only when the stock price Falls.
if the stock falls below the lower (bought) strike, you make your maximum Profit ;
if the stock rises to the strike, you make your maximum Loss . In between these points, your breakeven point lies at the Higher strike less the net debit.
Buy lower strike Put.
Sell the same number of higher strike puts with the same expiration date

Introduction to Bear Put Spread

Outlook

With a Bear Put, your outlook is bearish. You need a fall in the stock price.

Rationale

To execute a bearish trade for a capital gain while reducing your maximum risk.
The bought puts will have the effect of capping your downside, while the sold puts will reduce your cost basis, risk, and breakeven points.

Net Position

This is a net debit transaction because your bought puts will be more expensive than your sold puts, which are further out of the money.
Your maximum risk on the trade itself is limited to the net debit of the bought puts less the sold puts.

Effect of Time Decay

Time decay is helpful to this position when it is profitable and harmful when it is loss-making.

Time Period to Trade

It’s safest to trade this strategy on a longer-term basis

Breakeven [Higher strike – net debit]

Steps to Trading a Bear Put Spread

Steps In

Try to ensure that the trend is downward and identify a clear area of resistance.

Steps Out

Manage your position according to the rules defined in your Trading Plan.
If the stock rises above your stop loss, then sell the Long Put, and if you’re not permitted to trade Naked Puts, then unravel the entire position.
In any event, look to unravel the trade at least one month before expiration, either to capture your profit or
to contain your losses.

Exiting the trade - Bear Put Spread

Exiting the Position

With this strategy, you can simply unravel the spread by buying back the puts you sold and selling the puts you bought in the first place.
Advanced traders may leg up and down as the underlying asset fluctuates up and down.

Mitigating a Loss

Unravel the trade as described previously.
Advanced traders may choose to only partially unravel the spread leg-by-leg.

Advantages and Disadvantages

Advantages

Reduced risk, cost, and breakeven point for a medium- to long-term bearish trade as compared to buying a put alone.
Capped downside (although still 100% of the outlay).
The farther away from expiration you are, the more downside protection you have in the event of the stock rising rapidly.

Disadvantages

The higher yields only arise if you select significantly higher strikes Uncapped upside if the stock falls.
Capped upside if the stock falls.

Share this Content

Derivatives Analysis

Advanced Option Strategy