What is Bear Put Spread?

Spread the bear put. It's a popular strategy in options trading, and it allows bearish traders to maximize profits while minimizing losses. This strategy is useful in a bearish market where an investor speculates that the security's price will fall.

What does a bear put spread do? and How is used for it?

When someone wants to profit from security price drops but not in a large way, a bear put spread can be used. What is a bear spread and what are the steps involved? Both the buying and selling of a lower-priced put option with a higher strike are done simultaneously. Both puts have the same underlying asset (stock), and expire on the same date.

To fully understand bear put spread strategy strategy, it is necessary to first understand the options available and the two types of calls involved. The put option allows the owner to sell the asset underlying at strike price until the expiration date. A call option allows the owner to buy the asset underlying at its strike price, until it expires. The in the money (ITM), higher-priced option is the one that is available, while the OTM (out of the money) option is available. A bear put spread doesn't have to use OTM or ITM, but can include any of the two options. The strike price for the ITM has been overtaken already by the stock price. An OTM has an OTM strike price that is not yet reached by the stock, which means it does not have intrinsic value.

How does the bear put spread strategy work?

A net debit is a result of the bear put spread strategy. The lower strike price is subtracted from the higher price to calculate the net debit. A trader can lose the maximum amount on the bear spread strategy if he or she pays for it. This is called the net debit.

Loss or Profit from Bear Put Spread Option Strategy

What is a bear spread advantage? The trader can make a profit when the price falls in line with expectations. There won't be any profit if the price drops more than expected. The answer to the question of what is a bear spread is that it is a balance between risk and reward.

The loss is equal to the debit if the stock price rises above the ITM option. If the stock price rises above the OTM option but lower than the ITM then there is loss if the charges paid to structure the position exceed the strike price difference.

Bear put spread

Let's say that a stock X trades at Rs 50 right now. The Rs 40 put price equals Rs 4, while the Rs 30 put is Rs 1. A net loss of Rs 3 is caused by buying the Rs 40 put and selling the Rs 30-put. This is the maximum loss that could occur if the stock expires above Rs 40.

If the stock expires less than or equal Rs 30, then Rs 7 would be your maximum gain. You would buy the stock at Rs 30 and sell it at Rs 40. Then, you subtract the Rs 3 premium that you paid. The difference between strike prices and net debit is your maximum gain.

In the above example, if you want to breakeven on such trades, your break would be Rs 37. The Rs 40 option would be worth Rs 3. This is equivalent to the premium. However, the Rs 30 option would lose its value upon expiration. Breakeven is the net debit taken from the higher strike.

In conclusion

A bear spread strategy is a trading strategy that traders use to minimize losses and maximize profits. This strategy is considered bearish because it strikes a delicate balance between risk and reward.

You can open an online demat and trading account to get expert advice on the best ways to trade options. Before you start, it is important to do your research.