Bear Put Spread
The bear put spread is used by investors who are bearish about a particular stock. This strategy is a low risk, low reward strategy. To create a bear put spread you will use put options at market price. Similar with the bear call spread, this strategy becomes profitable when the price of the stock drops. You can create a bear put spread by purchasing at the money puts and then selling out of the money puts.
For example, supposing ABC is trading at $113.56, you can buy 10 120 puts at $110. Your maximum profit potential will be the difference between the strike prices minus the cost of the options. As such, your maximum profit will be $4,000 ([120 – 110 x 1,000] – 6,000). Conversely, your maximum loss will be limited only to $6000 you spent for creating the option. This is also the amount used in computing for the ROI.
|ABC trading @ $113.56|
|Buy 10 120 Puts @ $8.00||$8,000.00|
|Sell 10 110 Puts @ $2.00||($2,000.00)|
|Credit from Trade||($6,000.00)|
You might also want to review the bull call spread and the bear put spread since they are similar strategies with the bear put spread.
|Bullish Strategies||Neutral Strategies||Bearish Strategies|