What is a Bear Put Spread?
A Bear Put Spread involves buying a put option with a higher strike price and selling a put option with a lower strike price. This strategy is used when you expect the stock price to decrease moderately.
- You buy a put option with a higher strike price (e.g., $100).
- You sell a put option with a lower strike price (e.g., $90).
- You pay a net debit for this strategy (premium of the bought put minus the premium of the sold put).
How Payoff Works:
If the stock price falls below the lower strike price, you get the maximum profit. If the stock price stays above the higher strike price, your loss is limited to the net debit paid.
Example Payoff Scenarios:
- Stock Price = $85: The maximum profit is realized. Bought put pays $1500, sold put pays $500, net profit = $700 after the net debit of $300.
- Stock Price = $95: You exercise the bought put, sold put expires worthless, net profit = $200 after the net debit.
- Stock Price = $105: Both options expire worthless, net loss = $300 (limited to the net debit).