Bear Put Spread

What Is a Bear Put Spread?

A bear put spread is an options strategy used when an investor expects the price of an underlying stock or other asset to fall moderately. It involves buying a put option at one strike price and selling a put with a lower strike price, both on the same underlying asset and with the same expiration date. Because the sold put offsets part of the cost of the purchased put, the position is a type of vertical spread that is opened for a net debit.

How It Works

The long put, with the higher strike, gives its holder the right to sell the asset at that price, so its value tends to rise as the asset falls. The short put, with the lower strike, obligates the seller to buy the asset at that lower price if the option is exercised early or held to expiration. The premium received from selling it reduces the cost of the position. The trade-off is that gains stop growing once the asset falls below the lower strike.

• Maximum profit: the difference between the two strikes, minus the net debit paid.
• Maximum loss: the net debit paid, which occurs if the asset finishes at or above the higher strike.
• Breakeven point: the higher strike minus the net debit.

Breakeven = Higher strike price − Net debit

Example

Suppose a stock trades at $50. An investor buys a put with a $50 strike for $3 per share and sells a put with a $45 strike for $1 per share. The net debit is $2 per share. Maximum profit is the $5 difference between strikes minus the $2 debit, or $3 per share, reached if the stock is at or below $45 at expiration. Maximum loss is $2 per share if the stock is at or above $50. Breakeven is $48. These figures are illustrative only, since actual option premiums depend on market conditions.

Advantages and Disadvantages

Compared with buying a put outright, a bear put spread costs less and has a defined maximum loss. However, it also caps potential profit. The position's value is affected by time decay and by changes in implied volatility, so timing matters. Because the strategy depends on a directional view, a flat or rising market will usually cause the investor to lose some or all of the net debit paid.