PREMIUMBear Put Spread
Overview:
The bear put spread is popular because it’s a low-risk, low-return strategy. The strategy is employed when a put is bought, and a lower-strike put with the same expiration date is simultaneously sold.
Main Uses:
- The first reason an investor would use this strategy is if the investor is feeling bearish about the underlying stock. The investor is hoping for a moderate downturn in the underlying stock.
- The second reason an investor would use this strategy is if they are neutral on a stock. If the sold put has a higher vega than the purchased put, then the investor will make money at expiration as long as the stock has not moved higher. The underlying does not need to decline, it just needs to not rise.
Profit / Loss Bear Put Spread:
The below graph is a profit / loss graph of a bear put spread using the OptionsHouse P&L calculator, using AMZN as the ticker. The current stock price is $117. An in-the-money put was bought with a strike price of $125 for $13.50. An out-of-the-money put was sold with a strike price of $110 for $5.50. The break-even price of the spread is $117, or the strike of the purchased call minus the net debit paid ($8.00). If the stock price increases above $117, the investor will lose money (maximum loss is limited to the debit paid). However, if the stock price stays below $117, the investor will make money. Maximum potential profit, achieved if AMZN is below 110 at expiration, is limited to the difference between strike prices minus the premium paid, or $7.00.
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