The Bear Put Spread
A cheaper way to bet on a stock going down. By selling a lower strike put against your long put, you reduce your cost basis and define your risk.
What is a Bear Put Spread?
A Bear Put Spread (or Long Put Vertical) involves buying a put at a specific strike price (higher strike) while simultaneously selling another put at a lower strike price. Both puts have the same expiration date.
This strategy is used when you expect a moderate decline in the stock price. The short put reduces the cost of the trade but also limits your potential profit.
Is This Strategy Right for You?
Capital Requirements
Low. The cost is the net debit paid (premium of long put minus premium of short put).
Options Approval Level
Level 3. Requires spreads approval, as you are selling an option.
Best Suited For
- •Bearish outlook with a specific price target
- •Hedging a portfolio against moderate drops
- •Reducing the cost of speculative bearish bets
Pros and Risks
Advantages
- ✓Lower cost: Selling the lower strike put makes the trade cheaper than a naked put.
- ✓Defined risk: Max loss is limited to the initial debit paid.
- ✓Lower volatility sensitivity: Selling a put offsets some of the implied volatility risk of buying one.
Risks to Consider
- ⚠Capped profit: Profit is limited to the difference between strikes minus the debit.
- ⚠Assignment risk: Short put could be assigned early if ITM, though long put protects you.
- ⚠Need for timing: Stock must drop before expiration or value will decay.
How It Works
Key Terms
Identify Bearish Setup
Find a stock you believe is overvalued or facing headwinds.
Execute the Spread
Buy a put (usually ATM or slightly OTM). Sell a lower strike put (target price). Ensure expiration matches.
Manage Outcomes
Max profit occurs if the stock drops below the short strike. Max loss is the debit paid if stock stays above the long strike.
Worked Example: ABC at $100
Using a $100/$90 Bear Put Spread.
Bear Put Spread Payoff
Position Entry
Long Put
$100 Strike
Short Put
$90 Strike
Net Debit
$4.00
Max Risk
$400
Stock Drops to $85
Spread Value
$10.00 ($100-$90)
Option Cost
-$4.00
Net Profit
+$600 (Max Profit)
Stock Rises to $110
Spread Value
$0.00
Option Cost
-$4.00
Net Loss
-$400 (Max Loss)
Common Scenarios
Target Hit Early
If the stock drops quickly to your short strike, close the trade. You've likely made a good profit and there's no need to risk a bounce back.
Market Turns Bullish
If your thesis changes and the stock rallies, you can close for a partial loss before max loss is realized at expiration.