Bear Put Spread
The bear put spread is a bearish strategy with low risk and limited reward.
How it works: The investor is in a bearish mood and believes a stock will decrease in value. You then
A) buy a put at the next out-of-the-money strike price, then B) sell a put at the next strike price down.
Example: You are bearish about a stock trading at $46. To enter the bear put spread, you A) buy the $45
put for $7, and B) sell the $40 put for $5 in premium. Based on one contract, buying the put would cost
$700 and selling the put would bring in $500, leaving a net debit of $200. The maximum profit would be
the difference of the strike prices ($500) less the $200 it cost to enter the position, for a $300 profit.
The maximum loss would be the $200 it cost to get into the trade.
The payoff: You are profitable if the stock price decreases or stays the same.
The drawback: A debit spread requires four commissions, which takes a big bite out of the profits. A
bear call spread, which also operates under bearish
conditions, is a similar strategy that requires only two commissions.
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