The Bear Put Spread Strategy

The bear put spread is a strategy that allows you to profit as a stock goes down or even sideways. It involves buying and selling puts.

When you create this spread you sell an in the money put and buy a deeper in the money put on the same security. For example, you sell an $85 put for $10 and buy the $90 put for $14. From this you spend $4 initially.

If the stock stays below $85 we will be forced to buy the stock at $85. But because we bought the $90 put we will be able to sell it at $90, making us $5.

Max Profit

Your max profit on a bear call spread is the difference between the strike prices minus what you paid for the options. In the above example the difference between the strike prices, is $5 and we paid $4 to enter the trade.

So our max profit would be $1. You would realize your max profit as long as the stock stays below the strike price you sold. In this example that is $85.

Max Loss

The max loss on a bear call spread is the money you initially spend entering the trade. In this example it is $4. This means that you do normally risk more then you hope to make on the trade. However you can make up for it with the higher probability that the trade gives you.

Probabilities

This is a high probability trade because the stock only needs to stay below $85 to be profitable. Even if the stock comes up to $84.99 we are still profitable because the stock stays below the strike price of the option. The high probability of making money with this strategy is why many traders have found it a worthwhile investment.

It also typically gives off a higher return then the bear call spread, which is a similar strategy.