How Does Bear PUT Spread Work? | PUT Debit Spread Explained For Newbies (Part 3 of 4)

This is the part 3 explanation of the 4 Vertical Spread options strategies where I will explain more in-depth about another vertical spread strategy for bearish play, which is the Bear PUT Spread Strategy. This is also known as PUT Debit spread as the options buyer will pay a premium (debit) in order to open up the spread position. The premium paid is also the maximum loss for the options contract buyer.

The 4 vertical spread strategies are summarised below:

A bear put spread in an options strategy that consists of buying a put with a higher strike price and selling a put with a lower strike price. Both puts have the same underlying stock and the same expiration date. A bear put spread is established for a net debit (or net cost) and profits as the underlying stock declines in price. 

In the previous article, I mentioned that a bearish strategy of using PUT Options is to buy PUT options and thus in this Bear PUT Spread, buying PUT is predominant, which will result in net debit paid up front when the contract is established. In order to have net debit, the premium paid is higher than the premium paid.

Link to the previous article:
Vertical Spreads Options Strategies Explained For Newbies | A Simple Way To Understand And Remember Vertical Spreads

Using the direct correlation between PUT options premium and strike price, i.e. higher strike price = higher premium and vice-versa, the buy PUT leg will be at a higher strike price (higher premium) than the sell PUT leg (lower premium), to fulfill the condition of debit paid up front.

As such, the buy PUT will happen at a higher SP while the sell PUT will happen at a lower SP, as summarized below:

I hope this helps in your understanding and remembering of the Bear PUT Spread. This is a powerful strategy that you can use to short the market when the market is crashing or there is an obvious downtrend, while avoiding the higher premiums of buying PUT contracts.

What Is The Max Gain, Loss & Breakeven?

The maximum loss of a Bear PUT Spread is the premium that you pay when you open up the contract. This happens when both contracts expire OTM and become worthless.

The Maximum gain of a Bear PUT Spread is the difference of the strike price multiplied by 100 per contract, minus the premium you receive for the contract.

Max Gain = (Difference in SP x 100) – premium paid for contract

This is when both contracts expire ITM, thus you have to sell the shares at the higher price and buy the shares at the lower price.

The Breakeven Price is the higher SP – the premium price per share.

Bear PUT Spread Example

As an example, let’s say that Levi Strauss & Co. (LEVI) is trading at $50. Winter is coming, and you don’t think the jeans maker’s stock is going to thrive. Instead, you think it’s going to be mildly depressed.

So you buy a $40 put, priced at $4, and sell a $30 put, priced at $1. Both contracts will expire on 30 days later. Buying the $40 put while simultaneously selling the $30 put would cost you $3 ($4 – $1).

If the stock closed above $40 on expiration date, your maximum loss would be $3.

If it closed under or at $30, however, your maximum gain would be $10 on paper, but you have to deduct the $3 for the other trade and any broker commission fees.

The break-even price is $37—a price equal to the higher strike price minus the net debt of the trade.

Advantages of a Bull Put Spread
1. The benefit of a bear put spread is that the trader reduces the cost of the trade. If the trader doesn’t expect the price of the asset to drop much below the put option that was sold, this strategy is better than simply buying a put option.

2. A second advantage is that the breakeven price also rises. As a result of setting up a bear put spread instead of only buying a put option, the trader reduces the dollar risk if the trade goes against them — and also increases their probability of profit

Disadvantages of a Bull Put Spread
1. The downside of a bear put spread is that there’s limited profit potential as compared to buying a put option. The potential is limited to the difference between the two strikes minus the premium paid. If a trader is expecting a black swan or a capitulation event, it’s preferable to simply buy a put option, as prices may fall far below any support levels.

2. Time decay (or Theta) works against the bear put spread. This means a bear put spread has a negative Theta (loses money with time decay). The longer the option contract drags without in the desired direction, the higher the drop in premium for the option buyer. Thus, the option buyer may suffer a loss even if the share price stays stagnant or has dropped slightly.

Keen to learn about options trading but do not wish to pay for expensive courses, this newbie guide will help gain the knowledge and fundamentals to understand options better. And it’s totally free!
The Newbie’s Guide To Options Trading

After accumulating more than 600k of unrealized losses on my portfolio, I wrote this article to encourage friends and investors who are also losing a lot of money to the market.
If You Are Feeling Depressed From Losing Lots Of Money In The Stock Market, Here’s An Article For You

In the 10 years of my investing journey, I have made many mistakes but also learned many lessons from these mistakes. I compiled the 10 most valuable lessons that I have learned and may they help you succeed in your investing journey.
Happy 10 Years Of Investing | 348k (Realised) Profit, 635k (Unrealized) Loss & 10 Lessons Learnt

The precious 6 lessons I learnt after cutting more than half a million of losses in the stock market through bad investments and risky trades.
6 Lessons Learnt After Losing 551k In 10 Years Of Investing & Options Trading | What Newbies Should Know They Start Investing/ Trading

I did these 10 side hustles while holding a full-time job, so I share them here so you can be inspired to grow your wealth through a side hustle that you enjoy.
I Did These 10 Side Hustles While Working Full Time | 10 Side Hustle Ideas To Help You Earn An Extra Income

Struggling with inflation and high cost of living? Try these 10 methods to help you save money and accumulate more savings for investments or rainy days.
10 Ways To Save Money To Help You Fight Inflation & Rising Costs Of Living

Excited to start your trading journey or perhaps try out with a paper trading account to build your confidence in trading? Check out this step-by-step to help you get started:
How To Buy Options on Interactive Brokers (Step-By-Step)

Looking for ideas on what stocks to invest in or which stocks to trade? You can take reference from what I have been buying or selling. I try to update them as soon as I can in this section, as well as share my thoughts on executing these trades:

Also, check out my trading strategies in different market conditions, whether it is bullish, bearish or volatile:
How Not To Lose Money In Trading? | My Trading Strategies For Bullish, Bearish And Volatile Market

I watched tons of videos on YouTube since 2020 and if you are wondering if there are any useful channels that you can subscribe to for learning market trends, TA, FA, check out this compilation here:
My Secret Weapons For Options Trading: I Watch These YouTube Financial Channels Every Day

I concluded my first year of options trading with more than USD160k of gain, see how I do it and the capital I use for every month to give you a sense of the percentage yield I get out of my gains:
1st Year Options Trading Recap: The Journey Towards SGD$217,509 Profits In 2021

This blog is as authentic and as transparent as I can share, I do not just show the wins and hide the loss. I have made some very bad decisions in the first 8 years of investing and paid a huge price for them. Here is the loss I have accumulated during these years. I hope you learn some lessons from my mistakes.
I Cut $135,715 Worth Of Losses In The Last 1.5 Months

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