Bear Put Spread

1. Definition

A Bear Put Spread is a vertical spread strategy used when an option trader expects a moderate decline in the price of the underlying asset. * It involves buying and selling Puts of the same expiration date but different strike prices. * It reduces the cost of holding a long position but caps the profit potential.

2. Setup

It is constructed by: 1. Buying a Put at a Higher Strike Price ($K_2$). 2. Selling a Put at a Lower Strike Price ($K_1$). * Since the higher strike Put is more expensive than the lower strike Put, this trade results in a Net Debit (you pay upfront).

3. Risk & Reward Profile

• Max Profit: Limited to the spread width minus the net debit paid.
  • $$Max\ Profit = (K_2 - K_1) - Net\ Debit$$
  • Occurs when the stock price falls below the lower strike price ($K_1$).
• Max Loss: Limited to the Net Debit paid.
  • Occurs if the stock price stays above the higher strike price ($K_2$).
• Breakeven Point: $$K_2 - Net\ Debit$$

4. Strategy Logic

• Traders use this to lower the cost of a bearish trade.
• By selling the lower strike Put, you offset some of the premium cost of the higher strike Put. In exchange, you give up any profit potential below the lower strike price.