With volatility at the lowest levels in six month options are cheap so it’s a good time to check in on our bear put spread screener.
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 Wells Fargo (WFC).
Wells Fargo Bear Put Spread Example
Using the July 21 expiry, this trade involves buying the 42.50 put and selling the 32.50 put.
The price for the trade is $2.55 which means the trader would pay $255 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:
10 – 2.55 x 100 = $745.
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 39.95.
Let’s look at another example, this time on Bank of America (BAC).
BAC Bear Put Spread Example
The first BAC trade is also using the July 21 expiry and involves buying the 31 strike put and selling the 26 strike put.
The cost of the trade is $154 which is also the maximum loss with the maximum possible gain being $346. The maximum gain would occur if BAC stock fell below 26 on the expiration date.
The Barchart Technical Opinion rating is an 88% Sell with a weakening short term outlook on maintaining the current direction. Long term indicators fully support a continuation of the trend.
BAC is showing an IV Percentile of 55% and an IV Rank of 36.88%. The current level of implied volatility is 32.58% compared to a 52-week high of 50% and a low of 20.40%.
Of the 18 Analysts following BAC there are 8 Strong Buy, 1 Moderate Buy, 7 Hold, 1 Moderate Sell and 1 Strong Sell recommendations.
Let’s look at another example, away from the banking sector.
GOOG Bear Put Spread Example
The Alphabet (GOOG) example is using the July 21 expiry and involves buying the 115 strike put and selling the 90 strike put.
The cost of the trade is $1,075 which is also the maximum loss with the maximum possible gain being $1,425. The maximum gain would occur if GOOG fell below 90 on the expiration date.
GOOG is showing an IV Percentile of 63% and an IV Rank of 46.23%. The current level of implied volatility is 36.42% compared to a 52-week high of 48.96% and a low of 25.64%.
Of the 35 Analysts following AMZN there are 30 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.
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.
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