Bear Put Spread

A Bear put spread Options Strategy refers to buying an At The Money or In The Money Put Option and then selling a Put that is Out Of The Money. Both Options have the same Expiration (see Calendar Spread for strategies with different expiries). The Short (sold) side limits the maximum loss, but also caps the maximum profit as well. The position incurs a debit because the Long option is closer to the money.

Bear put Spreads are directional option strategies because they rely on the price action of the Underlying moving lower in order to generate a profit.

Bear put debit Spreads are typically initiated when Implied Volatility is low but expected to rise (which is usually when the price of the Underlying falls, in the case of Stock Options).



See the Profit & Loss diagram of the Bear Put Spread strategy at OptionCreator

Example
XYZ is trading at 2045

Long 1 x At The Money 2045 Strike Put for 37.58
Short 1 x Out Of The Money 2035 Strike Put for 32.89

Net debit to enter the trade: (-4.68)

All options expire worthless with XYZ trading at 2080

Long 1 x At The Money 2045 Strike Put is worthless (0)
Short 1 x Out Of The Money 2035 Strike Put is worthless (0)

The trader sustains the maximum loss, the (-4.68) debit to enter the trade.

XYZ expires at 2025

Long 1 x At The Money 2045 Strike Put is worth 20
Short 1 x Out Of The Money 2035 Strike Put is worth 10

Profit = 10
Minus the (-4.68) debit to enter the trade
Net profit = 5.32