With markets looking more volatile, 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 Bear Put Spread Screener for today:
Let’s adjust the screener to only include stocks with a sell rating:
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 Advanced Micro Devices (AMD).
AMD Bear Put Spread Example
Using the January 17 expiry, this trade involves buying the $119 put and selling the $117 put.
The price for the trade is $0.70 which means the trader would pay $71 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:
2 – 0.71 x 100 = $129.
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 $118.29.
Let’s look at another example.
KO Bear Put Spread Example
The Coca-Cola (KO) example is using the February 21 expiry and involves buying the $62.50 strike put and selling the $60 strike put.
The cost of the trade is $98 which is also the maximum loss with the maximum possible gain being $152. The maximum gain would occur if KO fell below $60 on the expiration date.
KO is showing an IV Percentile of 69% and an IV Rank of 51.73%. The current level of implied volatility is 15.96% compared to a 52-week high of 20.76% and a low of 10.82%.
Let’s look at another example, this time on Rtx Corp (RTX).
RTX Bear Put Spread Example
The RTX trade is using the February 21 expiry and involves buying the $115 strike put and selling the $110 strike put.
The cost of the trade is $198 which is also the maximum loss with the maximum possible gain being $302. The maximum gain would occur if RTX stock fell below $110 on the expiration date.
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.
