Search:

:: Profit & Loss

Profit

The profit on a Bear Put Spread is the difference between the strike prices less the premium.

 

Loss

The loss on the Spread is limited to the price of the premium paid.

 

Break Even

The break even point is the upper strike price less the premium paid.
 

Bear Put Spread
 
As with the Bull Call Spread, the Bear Put Spread views the change in the share price to be moderate, only this time the movement is expected to be negative. This strategy consists of buying an at-the-money put while at the same time selling an out-of-the-money put.
 
:: Trading Condition
Stock Amazon
Price $48.00
Outlook The internet sector is slowing which will soften its price.
:: Alert Example
Action Buy 5 Spreads
Buy $50.00 Put (ATM)
Premium $2.60
Sell $45.00 Put (OTM)
Premium $0.50
   
Strike Option   Debit/
Price Premium x 100 Credit
Bought Option $50.00 $2.60 $260.00 Dr
Sold Option $45.00 $0.50 $50.00 Cr
       
Cost per single spread $210.00 Dr
Cost per 5 spreads $1,050.00 Dr
 
:: Maximum Profit
Knowing the cost of the trade also tells you your maximum loss - it is $1,050, as you can't lose more than the premium you paid. Your maximum profit is also known - it is the difference between the strike prices less the premium times the number of spreads, which is $1,450:
Strike  
Price x 100
Sold Option $50.00  
Bought Option $45.00  
Difference Between Strikes $5.00 $500.00
   
Cost per single spread $210.00
Profit per single spread $290.00
Profit per 5 spreads $1,450.00
 
:: Profit Scenario
As with the Bull Call Spread, most advisors will trade out of the position before expiry to avoid being exercised. Consequently, brokerage will once again be an issue. It is for this reason that it is important to understand the nature of the trades being recommended, their impact on your trading position and the potential profit to be earned. At times, it may be more prudent to wait for a less costly trade than to enter one whose profit may not be worth the risk.