What is a bear put spread strategy?
A bear put spread will have one long put with a higher strike price and one short put with a lower strike price. Both will have the same stock and the same expiration date.
A bear put spread is founded for a net debit and profits as the stock declines in price. If the stock price falls below the strike price of the short put lower strike, the profit is limited and If the stock price rises above the strike price of the long put then the potential loss is limited.
Related Post: Also check Bull Call Spread – Option trading strategy
Bear Put Spread – Maximum Profit
The maximum profit can be obtained when the stock price closes below the strike price on the expiration date.
Both options expire in the money but the higher strike put that was bought will have a higher intrinsic value compared to the lower strike put that was sold.
The maximum profit for the bear put spread option strategy is equal to the difference in strike price minus the charge taken when the position was entered.
The maximum profit achieved when the price of the underlying is lesser than or equal to the strike price of the shot put. By using this formula you can calculate the maximum profit
- Maximum Profit for the bear put spread = Strike Price of Long Put – Strike Price of Short Put – Net Premium Paid – Commissions Paid.
Bear Put Spread – Limited Downside Risk
If the stock price grows above the put option strike price at the expiration date, then the bear put spread strategy undergoes a maximum loss equal to the debit taken when putting on the trade.
The maximum loss happens when the price of underlying is lesser than or equal to the strike price of the long put.
By using this formula you can calculate the maximum loss
- Maximum Loss for the bear put spread = Net Premium Paid + Commissions Paid
Bear Put Spread – Break-even Point
The price at which breakeven is obtained for the bear put spread position can be calculated using the following formula.
- Break-even Point for the bear put spread = Strike Price of Long Put – Net Premium Paid
How to make a bear put spread Strategy?
Using Options strategy builder in intradayscreener.com, you can easily build an option strategy for the bear put spread.
Step 1: You just need to select the indices and expiry date and click on add/edit to get started.
Step 2: Click on the Bear put spread strategy below.
Step 3: You will get detailed information on the option strategy like Premium, Max profit at expiry, Max losses at expiry, Breakeven at expiry, and a Bear put spread graph.
Bear Put Spread – Example
Let us take an example of Tata motors with the strike price of 325, buy and sell prices given in the table below.
In the Bear put spread, you need to buy one put option which is 325 and premium aid is 18.25, and sell one put option which is 315, and premium paid is 13.6.
|Expected stock price||325 PE BUY||325 PE Prem Paid||325 Net PE buy||315 PE SELL||315 PE prem recvd||315 Net PE Sell||Expected stock price||Bear Put Payoff|
By using the above calculation in the table, we can plot the payoff diagram for the bear put spread.
A Long Put is a beneficial strategy to apply when you anticipate the security to fall quickly. It also restricts the downside risk to the premium paid.
The possible return is infinite if Nifty moves lower significantly. It is suitable for traders who don’t have a huge capital to invest but could possibly make much bigger returns than investing the same amount directly in the underlying security.
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