Contents

Bear PUT Spread

Bear PUT spread is a bearish options strategy. It is also called as Long PUT spread. It involves selling a PUT of lower strike and buying a PUT of higher strike. It is a net debit position as the PUT you bought will have higher premium than the PUT you sold.

Trade Set-Up

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Sell lower strike PUT

short put-Finvezto

Buy higher strike PUT

Naked Put-Finvezto

Bear PUT Spread

Bear Spread-Finvezto

Entry Checklist

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Market Outlook
  • Bearish to Neutral Outlook
  • Price should be trading below a resistance zone
  • Volatility
  • Use this spread before earnings results are announced where the volatility is high.
  • Strike Price
  • Strike price should at least be 100-200 points above the resistance zone
  • Positional or Intraday?
  • This strategy is an earnings strategy. If there are company earnings results awaited and if you think the stock price might take a hit, then you can choose this strategy.
  • Risk Profile

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    Risk [Loss]
  • Maximum Risk is limited to the net debit paid. You cannot lose more.
  • Reward [Profit]
  • Maximum profit is limited to the difference in strike prices minus the net debit paid
  • Break Even Point
  • The strike price of the higher PUT minus the net debit paid
  • Options Greeks Impact

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    Time Decay Impact [Theta]
  • Time decay is helpful when the price falls steeply as you predicted
  • Time decay is harmful when price is going up against your prediction
  • Volatility impact [Vega]
  • When the price falls steeply, and if volatility increases it is helpful for the position
  • When price moves up and volatility increases, it is harmful for your position
  • Price Impact [Delta]
  • As long as price remains below the resistance level identified and below the strike price of the lower PUT sold, you will profit.
  • Trade Management & Exit

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    Rolling & Adjustments
  • Remember that it is a net debit strategy and has to be used only before earnings results announcements or when you expect a huge price fall.
  • Stop Loss
  • Stop Loss should be set in such a way that Risk is limited to 1-2% of your entire capital
  • Exit Conditions
  • Exit when price breaks above the resistance zone identified
  • Exit when your loss is 1-2% of your capital
  • Exit with stop loss after you lock in 50% of the maximum profit.
  • A Word of Caution

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    • This is a earnings strategy and should be used when you have a bearish view. Before earnings or result announcement the volatility will be high. So, you might not benefit by just buying a standalone PUT. You sell a lower strike PUT to counter the high volatility. Use this strategy when you expect a fall, but not a huge fall as it will limit your profits.