A bear put spread is a vertical spread that aims to profit from a stock declining in price. It has a bearish directional bias as hinted in the name. Unlike the bear call spread, it suffers from time decay so traders need to be correct on the direction of the underlying and also the timing.
A bear put spread is created through buying an out-of-the-money put and selling a further out-of-the-money put.
The maximum profit is equal to the distance between the strikes, less the premium paid. The loss is limited to the premium paid.
Let’s take a look at Barchart’s Short Bear Put Spread Screener for today:
Some interesting trades here with impressive Max Profit Percentage. Let’s take a look at the first item in the table – a bear put spread on Cisco (CSCO).
CSCO Bear Put Spread Example
Using the December 16 expiry, this trade involves buying the 45 put and selling the 30 put.
The price for the trade is $2.98 which means the trader would pay $298 to enter the trade. This is also the maximum loss. The maximum gain be calculated by taking the width between the strikes and subtracting the premium paid:
15 – 2.98 x 100 = $1,202.
The breakeven price for the trade is equal to the long put strike, less the premium. In this case, that gives us a breakeven price of 42.02.
Let’s strengthen our bearish screener by adding a parameter for any stock with a Sell rating greater than 60%. Here are the results:
Microsoft Bear Put Spread Example
The third example above is using the November 18 expiry and involves buying the 255 strike put and selling the 200 strike put.
The cost of the trade is $1,382 which is also the maximum loss with the maximum possible gain being $4,118. The maximum gain would occur if Microsoft (MSFT) stock fell below 200 on the expiration date.
The Barchart Technical Opinion rating is a 72% Sell with a strengthening short term outlook on maintaining the current direction. Long term indicators fully support a continuation of the trend.
MSFT is showing an IV Percentile of 65% and an IV Rank of 48%. The current level of implied volatility is 31.85% compared to a 52-week high of 47.14% and a low of 17.74%.
Of the 25 Analysts following MSFT there are 22 Strong Buy, 1 Moderate Buy and 2 Hold recommendations.
Let’s look at another example, this time on Intel (INTC)
Intel Corp Bear Put Spread Example
The first Intel example is using the November 18 expiry and involves buying the 30 strike put and selling the 20 strike put.
The cost of the trade is $239 which is also the maximum loss with the maximum possible gain being $761 The maximum gain would occur if INTC stock fell below 30 on the expiration date.
The Barchart Technical Opinion rating is a 100% Sell and ranks in the Top 1% of all short term signals. Long term indicators fully support a continuation of the trend.
INTC is showing an IV Percentile of 81% and an IV Rank of 67%. The current level of implied volatility is 38.63% compared to a 52-week high of 47.53% and a low of 20.48%.
Of the 22 Analysts following INTC there are 1 Strong Buy, 1 Moderate Buy, 14 Hold, 1 Moderate Sell and 5 Strong Sell recommendations.
Mitigating Risk
Thankfully, bear put spreads are risk defined trades, so they have some build in risk management. The most the MSFT example can lose is $1,382 while the AAL trade has risk of $239.
For each trade consider setting a stop loss of 30% of the max loss.
Please remember that options are risky, and investors can lose 100% of their investment.Â
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
*Disclaimer: On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. Data as of after-hours, September 13, 2022.
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