Bear Put Spread

If you are feeling generally negative about a stock, bear spreads offer a low risk, low return strategy. The best way to build a Bear put spread is to use put options at or near the current market price of the stock. Bear put spreads will profit when the underlying stock price goes down, and are typically created by buying at the money puts and selling out of the money puts.

Example: Using Disney World (DIS) we can create a Bear put spread using in the money options. With DIS trading at $18.50 you might buy ten $20 Puts and sell ten $15 Puts.

You would buy the $20 Puts for $3.50 and sell the $15 Puts for $.90. The total cost of the trade will be $2600, which is also the maximum loss. The maximum profit is $2400 ((20 – 15) x 1000) – 2600).

Using ShareCharts Option Strategies for Bear Put Spreads the entire transaction can be seen clearly. Go to Derivatives < Option Strategies and select Bear Put Spread from the ‘Strategy’ Drop Down Box. Enter in all relevant parameters and click ‘Update’ to view the chart.