Bear Put Spread

A bear put spread is a vertical spread options strategy designed for bearish market conditions. You execute this strategy by simultaneously buying a put option at a higher strike price and selling a put option at a lower strike price. Both options must pertain to the same underlying asset and share the same expiration date. Mechanics:

Purchase High Strike Put

Buy a put option with a higher strike price.

Sell Low Strike Put

Sell a put option with a lower strike price.

Suppose you are bearish on Stock XYZ, currently trading at $100. You could:

Buy a $100 strike put

Costs you $5 per contract.

Sell a $90 strike put

Earns you $2 per contract.

Your net cost (or premium) for this spread is $3 per contract ($5 - $2).

Payoff structure:

Maximum Gain

The maximum gain occurs if the stock price falls to or below the lower strike price ($90 in this example). The gain is calculated as the difference between the strike prices minus the net premium paid.

$$\text{Max Gain}=(100-90)-3=7\text{ per contract}$$

Maximum Loss

The maximum loss is limited to the net premium paid.

$$\text{Max Loss}=3\text{ per contract}$$

Breakeven Point

The breakeven point is the higher strike price minus the net premium paid.

$$\text{Breakeven}=100-3=97$$

The trade you are making is explicit in those three numbers: you gave up everything below $90 in exchange for paying $3 instead of $5. Selling the lower strike cuts your cost by 40% and caps your gain at $7 where an outright put would have kept paying all the way to zero. That is the right trade when you expect a moderate decline and the wrong one when you are hedging against a crash — which is precisely the scenario where the capped leg stops paying.

Best used when you expect a moderate decline in the underlying asset, not a drastic collapse. High volatility makes outright puts expensive, and selling the lower strike recovers part of that cost, which is when the spread earns its keep.

Be clear about which way time runs, because this is commonly stated backwards. A bear put spread is a debit spread, and while the stock sits above your long strike the long leg is the nearer to at-the-money of the two and therefore carries the larger theta. Time decay works against you until the underlying falls through the long strike; only once the position is well in the money does the short leg’s decay start dominating and time begin working in your favor. If your thesis is a decline that takes months to arrive, a debit spread bleeds while you wait.