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.
With the market looking a bit volatile here, it could be a good idea to add some bearish trades to your options portfolio.
Let’s take a look at Barchart’s Bear Put Spread Screener for today:
Some interesting trades here with impressive Max Profit Percentage.
Let’s strengthen our bearish screener by adding a parameter for any stock with a Sell rating greater than 40%. Here are the results:
Let’s take a look at the first item in the table – a bear put spread on Apple (AAPL).
Apple Bear Put Spread Example
Using the June 20 expiry, this trade involves buying the $225 put and selling the $210 put.
The price for the trade is $5.55 which means the trader would pay $555 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 – 5.55 x 100 = $945.
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 $219.45.
The Barchart Technical Opinion rating is a 56% Sell with an Average short term outlook on maintaining the current direction.
Of the 36 Analysts following Apple there are 17 Strong Buy, 5 Moderate Buy, 10 Hold, 1 Moderate Sell and 3 Strong Sell recommendations.
BAC Bear Put Spread Example
The BAC example is also using the June 20 expiry and involves buying the $42 strike put and selling the $39 strike put.
The cost of the trade is $120, which is also the maximum loss with the maximum possible gain being $180. The maximum gain would occur if Bank of America (BAC) stock fell below $39 on the expiration date.
The Barchart Technical Opinion rating is a 56% Sell with a Strengthening short term outlook on maintaining the current direction.
Of the 23 Analysts following BAC there are 17 Strong Buy, 4 Moderate Buy and 2 Hold ratings.
Let’s look at another example, this time on Amazon (AMZN).
AMZN Bear Put Spread Example
The AMZN example is using the June 20 expiry and involves buying the $195 strike put and selling the $180 strike put.
The cost of the trade is $615 which is also the maximum loss with the maximum possible gain being $885. The maximum gain would occur if Amazon stock fell below $180 on the expiration date.
The Barchart Technical Opinion rating is a 88% Sell with a Strengthening short term outlook on maintaining the current direction.
Of the 52 Analysts following AMZN there are 47 Strong Buy, 4 Moderate Buy and 1 Hold ratings.
Mitigating Risk
Thankfully, bear put spreads are risk defined trades, so they have some build in risk management. The most the Apple example can lose is $555 while the Bank of America example can lose $120 and the Amazon trade has risk of $615.
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. 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.
