Bear Put Spread strategy entails doing two things at the same time: purchasing
a put on an underlying stock and writing a put on the same underlying stock.
bearish to bearish.
the trader or investor believes that they are in a moderately bearish
environment, they will use this strategy to take advantage of a decrease in
is trading at $40 but you think it is under pressure and might go lower. The
bear put spread strategy would be to simultaneously buy a $40 put and sell a
$35 put. You wold purchase the $40 put for $1.50 and sell a put for $.50. The
total spread costs $100 to arrange ($150 minus $50).
GE finishes at $40 or above, all you lose is the $100 because both puts would
value. If GE finishes at $39, you would break even because the long put would
be in-the-money by $1 and the other put would be without value. If GE finishes
lower than $35, the value of the spread is $500. If GE finishes below $35,
those additional gains in the $40 put are offset by the increased value of the
$35 short put. So the maximum gain is the $500 net value of the trade less the
initial $100 it cost to set up, or $400.
allows the trader or investor to put into place a double hedge. By receiving
the premium from writing the put with the lower strike price, they offset the price
they paid for the put with the higher strike price. Also, the put with the
higher strike price reduces the risk of the written put if the owner is
assigned an exercise notice and has to buy the underlying shares, since the
strike price was previously determined.
risk with a Bear Put Spread is that if the underlying stock price increases
above the strike price, the whole amount of the net cash outflow, or net debit
paid for the bear put spread, will be lost. The reward accrues as the stock
between strike prices minus net cash outflow/debit.
cash outflow/debit paid.
break even point for a Bear Put Spread is the strike price of the purchased put
minus the net debit paid, or net cash outflow.
effects the time value of the put, and the effects are different for whether
the options are in-the-money, out-of-the-money, and the time remaining on the
Of Time Decay
decay will be different depending on where the underlying stock price is. If it
is between the strike prices, the effect will not be significant. If it is
close to the lower strike price, profits will increase at a faster pace. If it
is close to the higher strike price, losses will increase at a faster pace.
Bear Put Spread can be sold if the trader or investor wants to capture a profit
or stem a loss.
both of the options have value, they will be closed out when they expire. Or
the trader or investor can exercise the put and sell the underlying shares or
establish a short stock position. If only the purchased put is in-the-money,
then it can be sold.