Bear Put Spread
IntermediateA bear put spread is an options strategy that profits from a moderate fall in an asset's price, created by buying a put option and selling another put option with a lower exercise price on the same asset and expiry date.
Buying a put option on its own profits from a price fall, but it can be expensive. Selling a lower-priced put reduces the cost, but also caps the maximum profit.
For example, a share trades at 50. A trader buys a put with an exercise price of 50 for 4 and sells a put with an exercise price of 45 for 1.5. The net cost is 2.5. If the share falls to 45 or below at expiry, the spread is worth its maximum of 5, the difference between the exercise prices, giving a profit of 2.5. If the share stays at 50 or above, both options expire worthless, and the trader loses the 2.5 paid.
The maximum loss is limited to the net cost, and the maximum profit is limited to the difference between the exercise prices minus the net cost. The break-even point at expiry is the higher exercise price minus the net cost, in this case 47.5.
A bear put spread suits traders who expect a moderate decline rather than a crash. It is part of a family of spread strategies that combine options to balance cost, risk and potential reward.
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