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Bear Put Spread Option Trading Strategy Explained

Published on Thursday, April 19, 2018 | Modified on Wednesday, June 5, 2019

The Bear Put strategy involves selling a Put Option while simultaneously buying a Put option. Contrary to Bear Call Spread, here you pay the higher premium and receive the lower premium. So there is a net debit in premium. Your risk is capped at the difference in premiums while your profit will be limited to the difference in strike prices of Put Option minus net premiums.

This strategy is used when the trader believes that the price of underlying asset will go down moderately. This strategy is also known as the bear put debit spread as a net debit is taken upon entering the trade.

This strategy has a limited risk as well as limited rewards.

How to use the bear put spread options strategy?

The bear put spread strategy looks like as below for NIFTY which are currently traded at Rs 10400 (NIFTY Spot Price):

Suppose NIFTY shares are trading at 10400. If we are expecting the price of NIFTY to go down in near future, we buy 1 ITM NIFTY Put and sell 1 OTM NIFTY put to implement this strategy.

If NIFTY rises, your loss will be the net difference in premiums. If it falls, your profit will be the difference between two strike prices minus the net premium paid.

When to use Bear Put Spread strategy?

The bear call spread options strategy is used when you are bearish in market view. The strategy minimizes your risk in the event of prime movements going against your expectations.

Example

Example 1 - Stock Options:

Let's take a simple example of a stock trading at Rs 38 (spot price) in June. The option contracts for this stock are available at the premium of:

• July 40 Put - Rs 3
• July 35 Put - Rs 1

Lot size: 100 shares in 1 lot

1. Buy July 40 Put: 100*3 = Rs 300 Paid
2. Sell July 35 Put: 100*1 = Rs 100 Received

Net debit: Rs 300 - Rs 100 = Rs 200

Now let's discuss the possible scenarios:

Scenario 1: Stock price remains unchanged at Rs 38

• Buy July 40 Put expires in-the-money with an intrinsic value of (40-38)*100 = Rs 200
• Sell July 35 Put Expires Worthless
• Net debit was Rs 200 which was paid as net premium.
• Total Loss = 200 - 200 (net premium paid) = 0

In this scenario no profit or loss is made.

Scenario 2: Stock price goes up to Rs 42

• Buy July 40 Put expires worthless
• Sell July 35 Put expires worthless
• Net debit was Rs 200 which was paid as net premium.
• Total Loss = Rs 200 (net premium paid)

In this scenario, we lost total Rs 200 which is also the maximum loss in this strategy.

Scenario 3: Stock price goes down to Rs 34

Same as scenario 1:

• Buy July 40 Put Expires in-the-money with an intrinsic value of (40-34)*100 = Rs 600
• Sell July 35 Put Expires in-the-money with an intrinsic value of (34-35)*100 = -Rs 100
• Net debit was Rs 200 which was paid as net premium.
• Total Profit = 600 - 100 - 200 (net premium paid) = Rs 300

This Rs 300 is also the maximum profit earned in this strategy.

Example 2 - Bank Nifty

Market View - Bearish

When you are expecting the price of the underlying to moderately drop.

Actions

• Buy ITM Put Option
• Sell OTM Put Option

Breakeven Point

Strike Price of Long Put - Net Premium

The breakeven point is achieved when the price of the underlying is equal to strike price of long Put minus net premium.

How to exit?

Reverse the trade by buying sold Put and selling bought Call Similar Strategies:

Simillar Strategies

Bear Call Spread, Bull Call Spread

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