Make Money From Falling Prices With Bear Put Spreads

By Owen Trimball

What is the difference between bear put spreads and bear call spreads, for example? Do you really understand why they are each called by that name? This is all about understanding why our options trading terms are what they are.

Here´s how it works.

The first word in the expression indicates your opinion of the market. So a bear put spread would indicate that you think the underlying stock under consideration is about to experience a price dive. To put it another way, you´re bearish regarding the stock, which means your vertical spread strategy will exhibit that.

The next part of the expression signifies not just the kind of spread you plan to do, but when combined with the bearish nature of your outlook for the stock, shows that it will be a debit spread (not a credit spread). Had you been doing a credit spread, you would want the underlying to remain away from the spread strike prices until option expiry date in order for it to be profitable. But for a debit spread you´d ideally want it to penetrate through both strike prices for maximum profit.

Bear put spreads are option debit spreads that are set up by buying put options having a strike (exercise) price which is near to the current market price of the share ... and simultaneously selling the identical number of put options at an exercise price which is below the bought options. Because the bought options will be more high priced (being nearer to the money) compared to the sold ones, the net result is a debit to your brokerage account - hence, the 'debit spread' part of the trade.

Since we enter put debit spreads on the basis that we can make significant gain if the underlying price falls, they offer a way of entering a greater number of option positions at less cost than simply buying (going long) puts. They also permit greater overall flexibility should the underlying price temporarily move against us, for the reason that we might contemplate buying back the ´sold´ position for a fraction of what we sold it, on the basis that should the stock return to its downward trend, we will profit from the remaining bought put option, which we now own at a massive discount.

Bear Put Spreads need to be distinguished from bear call spreads. The latter are credit spreads, again the result of a bearish view of the market but made up of call options (not put options) but relying on the underlying stock to remain away from their strike prices.

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About The Author
Owen has traded options for many years and is writes for "Options Trading Mastery" - a popular site created to explain option trading. Discover the best Option Trading Strategies and empower yourself for trading success!