put is a mildly bearish option strategy that allows for some upward stock
movement as well.
option-info and options-graphs sites:
Put , ATM strike to 1 strike up
Bear Put Spread, Bear Put Vertical
Outlook: Neutral to mildly bearish. The stock must stay near where
it is at the time of entry, or fall, for the strategy to gain
buy Put 1 strike higher than current stock price, and sell Put at
or near current stock price.
when: stock stays put, rises slightly, or falls.
Gain: difference in strike prices x number of shares represented
- initial debit.
when: stock rises beyond the breakeven point.
Loss : limited to the initial debit.
Calculation: Long Put strike - initial debit.
compared to short stock: limited risk, less margin needed, greater
leverage, can gain if stock stays put or rises slightly.
compared to short stock: gains are limited to the downside if stock
falls below the sold strike.
after entry, increasing implied volatility is positive if the stock
rises, but negative if the stock falls. Since you are bearish (you expect
the stock to fall), the best time for entry is when volatility is high,
so that a return to normal (lower) volatility helps the strategy.
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 at the higher strike plus
Short Put at the lower strike.
Bear Put can be used if you are neutral to bearish on a stock, but want
to reduce the cost of entry compared to buying an ITM 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. Selling some high IV with the Bear Put
levels the playing field.
- The strategy
has limited profit potential to the downside, so you don't want to be
- A situation
that might fit this Bear Put strategy is one in which you believe a
stock has "peaked" on over-enthusiasm, which will increase
the IV. If you expect a drop in the stock, the strategy can benefit
from a drop in stock prices as well as the IV returning to normal levels.
comfortable and successful with the Covered
Call or Bull Call, -1 to ATM
strategies for uptrends might consider this Bear Put for taking advantage
of mild downtrends. It has the same features of limited gains with some
"upside" protection instead of "downside" protection.
this is a mildly bearish position, the trader is expecting the stock
to stay put or fall. If the stock rises, the trader would be wise to
cut his losses short. Using the example graph, if the stock price rose
to about $52.50 at any time, the trade could be exited for about a $100
loss. Just sitting and waiting could result in a loss more than three
times that amount, or $347.
- If the
stock falls below 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 or below the sold strike.
a Bear Put near the expiration date depends on the current stock price:
the stock is below the short strike and the time value of the short
put drops to .05 or .10, you should buy back the short put, otherwise
you risk having stock put to you. Selling the long put at the same
time will lock in a gain.
the stock is above the short strike, the short put will expire worthless
and you don't need to do anything with it. You can exercise the
long put if you are still bearish. Exercising a put when you don't
own the stock will result in being short the stock, with all the
risks inherent to that position.
- It is
possible to roll the entire bear put to lower strike prices if the stock
drops, but that really amounts to taking a gain on one trade and opening
- It is
possible to roll the entire bear put to higher strike prices if the
stock rises, but that really amounts to taking a loss on one trade and
opening another. Plus, you are entering another bearish strategy yet
the stock is acting bullishly.
- Or if
the stock is 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, with the same or lower strike prices,
if you are still bearish on the stock