Bear Put Spread
Bear Put Spread
A bear put spread is an Options trading strategy that involves buying a put option and simultaNeously selling another put option with the same expiration date but a lower Strike Price. This strategy is used when an investor anticipates a decline in the price of the underlying Asset.
Components
- Long Put: Buy a put option at a higher Strike Price.
- Short Put: Sell a put option at a lower Strike Price.
Examples
Suppose a Stock is currently trading at $50:
- Long Put: Buy a put option with a Strike Price of $50 for a premium of $3.
- Short Put: Sell a put option with a Strike Price of $45 for a premium of $1.
The net cost of the spread is:
Net Cost = Premium Paid – Premium Received = $3 – $1 = $2.
Potential Outcomes
- If the Stock price falls below $45, the maximum profit is:
- If the Stock price is between $45 and $50 at expiration, the profit is less than $3 but more than the net cost.
- If the Stock price is above $50, the maximum loss is:
Max Profit = (Strike Price of Long Put – Strike Price of Short Put – Net Cost) = ($50 – $45 – $2) = $3.
Max Loss = Net Cost = $2.
Use Cases
The bear put spread is suitable for investors who are moderately bearish on a Stock and want to limit their potential losses while benefiting from a decline in price.