What Is a Bear Put Spread?
If you're expecting a price drop in an asset, a bear put spread is an options strategy you can use to minimize costs. You buy and sell puts with the same expiration but different strike prices. This caps your maximum profit at the difference between the strikes minus the net cost, and it's a safer bet than short-selling. Remember, a put option lets you sell an asset at a set price before expiration. We also call this a debit put spread or long put spread.
Key Takeaways
This is a strategic move for when you anticipate a moderate to significant decline in an asset's price. You purchase and sell puts on the same asset with different strikes but the same expiration. Your max profit is the strike difference minus net cost, and max loss is just your initial investment. It limits risk better than shorting the stock outright. Use it in modestly declining markets, but know it caps gains if the price plummets.
How to Implement a Bear Put Spread Strategy
Let's say a stock trades at $30. You can set this up by buying one put contract at a $35 strike for $475 and selling one at $30 for $175. That nets you a $300 outlay. If the asset closes below $30 at expiration, you profit $200— that's the $500 strike difference minus your $300 cost.
Pros and Cons of Utilizing a Bear Put Spread
The big plus here is lower net risk—you offset the cost of the higher put by selling the lower one, making it cheaper than a single put. It's way less risky than shorting, where losses can be unlimited if the stock rises. If you expect a slight fall before expiration, this fits. But if it drops more, you miss extra profits. That's the trade-off.
Pros
- Less risky than simple short-selling
- Works well in modestly declining markets
- Limits losses to the net amount paid for the options
Cons
- Risk of early assignment
- Risky if asset climbs dramatically
- Limits profits to difference in strike prices
Bear Put Spread Example in Trading
Take Levi Strauss & Co. trading at $50 on October 20, 2019. If you think it'll dip mildly before winter, buy a $40 put for $4 and sell a $30 put for $1, both expiring November 20. That costs you $3 net. If it closes above $40, you lose $3 max. Below $30, you gain $7 after costs. Break-even is $37.
The Bottom Line
You use a bear put spread when you're bearish and expect a price decline. By buying and selling puts with different strikes, you aim for max profit with limited losses. It's less risky than short-selling, but assess the market carefully. It works in moderate declines, capping losses to your net pay and profits to the strike differential. Watch for early assignment and market surprises.
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