A very bearish
but limited risk option spread strategy, with less of a debit than just
buying long put(s).
option-info and options-graphs sites:
Put, 1 strike down to ATM strike
Bear Put Spread, Bear Put Vertical
Outlook: Very bearish. The stock must fall at least as much as your
debit just to break even. The stock must fall more to show a gain.
buy Put ATM and sell Put OTM.
when: stock falls enough to overcome the initial debit.
Gain: difference in strike prices - initial debit.
when: stock rises, does not fall, or does not fall enough.
Loss : limited to the initial debit.
Calculation: Long Put strike - initial debit.
compared to short stock: limited risk, less capital needed, greater
compared to short stock: gains are limited to the downside if stock
falls more than the sold strike.
after entry, increasing implied volatility is negative if the stock
falls, but positive if the stock rises.
after entry, the passage of time is positive if the stock falls,
but negative if the stock rises.
Requirement: None. The initial debit must be paid in full.
see the Vertical Spread Strategies page and
Bear Put debit spread
Equivalent: Short Stock plus Long Call ATM plus Short Put OTM.
Bear Put can be used if you are very bearish on a stock, but want to
reduce the cost of entry compared to just buying an ATM Long Put. This
is especially true if the options have a higher-than normal IV. Just
buying a long put puts you at a disadvantage in terms of the higher
price caused by the higher IV. If you also sell a high IV put, you level
the playing field.
- The short
put(s) will limit gains to the downside, so you don't want to be "too"
- One sometimes
difficult aspect of the Bear Put is that increasing implied volatility
works against you if the stock falls as you expect. And often when a
stock falls, implied volatility does goes up, because fearful stock
owners are increasing the demand for puts.
- This Bear
Put can be used to anchor trading in a stock you expect to be volatile
below the long strike. For instance, after entering the position, you
could take gains on the short puts whenever there is a volatile day
to the upside, and sell the puts again whenever there is a volatile
day to the downside. Every gain taken on short put buybacks reduces
your risk by the amount of the gain. It is possible to end up with a
zero risk long put, also known as a "free
ride". This is by no means a guaranteed outcome.
- This Bear
Put can be used as part of a "short stock enhancement"
strategy. See the Stock
page for the bullish version. You can use the Bear Put with Short Stock
in the same way to enhance a downward move in stock prices.
this is a very bearish position, the trader is expecting the stock to
fall. If the stock rises instead, the trader would be wise to cut his
losses short. If the stock rises above the long strike and the time
to expiration drops to just a couple weeks, you can see from the option
graph that the loss will be less than the maximum, and it is probably
best to take it. Just sitting and waiting could result in the maximum
- If the
stock falls most of the way to the sold strike, the trader should stick
with the position. As the option graph shows, just the passage of time
is a benefit at any stock price near the sold strike.
- If the
stock falls below the strike you sold and the time value of that put
drops to .05 or .10, you should close the position. Otherwise you risk
being "put to", meaning you must buy the stock at the short
strike price. If that should happen, you can use your long put to put
the stock to someone else at the long strike.
- It is
not usually recommended to adjust one part of a Bear Put. If you take
a trading profit on the short puts when the stock rises for instance,
you are actually increasing your maximum risk. You might think you will
sell the puts again the next time the stock falls, but what if it doesn't?
- It is
possible to roll the entire bear put to higher strike prices if the
stock rises, but that really amounts to closing one trade at a loss
and opening another trade in hopes of a gain. Plus, the stock has not
behaved bearishly yet you are taking a second bearish position.
- If a bear
put works out better than you expected and you want to go short, you
can buy back the short puts, and exercise the long puts, so that you
end up with just short stock, with all the inherent risks and rewards.
- Or if
the stock falls to near the sold put strike with expiration near and
you have made 80% or so of the total possible on the short puts, you
can roll everything out to the next month, and lower strike prices,
if you are still bearish on the stock.