Bear Spread

What Is a Bear Spread?

A bear spread is a vertical spread built from two options on the same underlying asset with the same expiration date but different strike prices. The trader holds a bearish view, meaning they expect the asset's price to fall, though not necessarily by a large amount. Because one option is bought and another is sold, both the cost and the maximum risk of the position are known when the trade is opened. Bear spreads can be built with either put options or call options.

How It Works

The bear put spread is the most common form and is a debit spread. The trader buys a put with a higher strike price and sells a put with a lower strike price. The purchased put costs more than the premium received for the sold put, so the trader pays a net amount up front. The sold put offsets part of that cost but also limits the gain: below the lower strike, the two puts' gains largely cancel out.

The bear call spread works in the opposite way and is a credit spread. The trader sells a call with a lower strike price and buys a call with a higher strike price, receiving a net credit when opening the position. Its maximum profit is that credit, and its maximum loss is the distance between the strikes minus the credit received.

For a bear put spread, the formulas are:

Maximum profit = (Higher strike − Lower strike) − Net premium paid Maximum loss = Net premium paid

Example

Consider a hypothetical stock trading at 50. A trader buys a put with a strike of 50 and sells a put with a strike of 45, both expiring on the same date, for a net cost of 2 per share. The maximum profit is (50 − 45) − 2 = 3 per share, reached if the stock finishes at or below 45 at expiration. The maximum loss is 2 per share, which occurs if the stock finishes at or above 50. The breakeven point is 48 (the higher strike minus the net cost).

Advantages and Disadvantages

• Defined risk: the maximum loss is known when the trade is entered.
• Lower cost: selling the lower-strike option reduces the upfront cost compared with buying a single put.
• Capped gains: if the price falls sharply, the trader gives up the additional profit beyond the lower strike.
• Timing matters: if the price does not move far enough by expiration, the trader may lose the premium paid.
• Time decay and changes in implied volatility can affect the position's value before expiration.
• Multi-leg trades often involve more commissions than single-option trades.