With a Bear Put Spread, you want to buy the higher strike put and sell the lower strike put. The effect is to hedge your higher strike put, and offset the premium cost by writing an option. Just like its cousin, the bull call spread, the effect is to pick a strike “zone” within which profits will vary, and above which, profits will be maximized.
Bear put spreads allow you to be directional (bearish in this case), without betting the farm. Even though you have to deal with two legs on the trade, spreads can be cheaper than buying a single put.
Picking the Bear Put Spread
Bear put spreads can be executed at various points of money-ness. Be aware however, that deep-in-the-money spreads carry the added risk of exercise - but only if the lower strike is in-the-money. The high probability of success, therefore, is somewhat tainted by the possibility of early exercise, an event over which you have no control. Bear put spreads are executed as a debit, just like bull call spreads. Your prediction is that the underlying stock will go down.
Bear put spreads are executed as a debit, just like bull call spreads. Your prediction is that the underlying stock will go down. The reason you are buying a bear put spread, rather than a single put option, is that you want to offset the premium you would have to pay for the put all by itself. You are willing to forego some profit potential in the event that the underlying stock moves downward dramatically.
Use our options P&L calculator to model out the profit and loss potential of this trade.
*These examples omit the costs associated with trading options, and you'll need to figure that into your overall returns. At Zecco Trading, options commissions are just $4.50 per trade and $0.50 per contract.