Investors use bear put spreads when they are bearish on an underlying stock. The higher strike put is purchased and the lower strike put is written. This creates a net debit that is less than if the higher strike put option was purchased outright. As the underlying stock moves closer to the strike prices both puts gain value. However the purchased put will gain more value, offsetting losses from the written put. Again, the advantage is that the initial capital requirement is less. However this position has capped rewards as well.
Components: Buy higher strike put option and sell lower strike put option
Margin Requirement = Net Debit
Breakeven = Higher Strike - Net Debit
Maximum Loss = Net Debit
Maximum Profit = Difference In Strikes - Net Debit
An investor is bearish on XYZ stock which is trading
at $55 per share. To open a bear put spread:
Sell December 45 put option for a credit of $2.20
Buy December 50 put option for a debit of $4.00
Net Debit: $1.80
Margin Required: $1.80
Breakeven: $48.20
Max. Loss: $1.80
Max. Profit: $3.20
Bear Put Spread Risk Profile
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