Options Trading Strategies Bear Put Spread

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Options Trading Strategies

Bear Put Spread

Long put spread

When a trader is moderately bearish on the market he can implement this strategy. Bear-Put-Spread involves buying of ITM Put Option and selling of an OTM Put Option. If prices fall, the ITM Put option starts making profits and the OTM Put option also adds to profit at a certain extent if the expiry price stays above the OTM strike.

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The long put spread, or bear put spread, is used when you’re bearish on a stock and have a target price to the downside. It’s simply the inverse of the long call spread from earlier. However, you’re using put options here.

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.

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.

However, if it falls below the OTM strike, then it starts making losses which will be mitigated by ITM Put which generates profit.

There is no compulsion that the Bear Put Spread has to be created with an ITM and OTM option. The Bear Put spread can be created employing any two put options. The choice of strike depends on the aggressiveness of the trade.

To implement a long put spread, you would just buy a put with strike price X and sell a put with strike price Y. Generally, the stock price will be at or below strike price Y and above strike price X.

The maximum value of a long put spread is usually achieved when it’s close to expiration.

Break-even Your break-even price at expiration is Strike Price of Long Put minus the net debit premium paid.

Risk: Limited, your maximum potential loss is limited to the net debit paid.

Reward: Limited

Action

Buy ITM Put Option

Sell OTM Put Option

Bear Put Spread Example

Suppose that NIFTY is trading at 11200 levels and Mr. G is bearish on the market and expects it to fall in the near future.

He implements the Bear-Put-Strategy and lot size is 75.

He buys one NIFTY 11300 ITM Put Option for a premium of Rs. 230 & sells one NIFTY 11000 OTM Put Option for a premium of Rs. 70. His net investment will be Rs. 12,000. ((230-70)*75]

Here’s a look at the payout diagram at expiration with results.