Weekly Strategy Discussion

The Weekly Strategy Discussion is designed to assist individuals in learning how options work and in understanding various options strategies. Options involve risk and are not suitable for all investors. The strategies discussed are for educational and illustrative purposes only, and should not be construed as an endorsement, recommendation or solicitation to buy or sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.

Bear Put Spread

Example:              XYZ stock is trading at $39 

Outlook:               You are moderately bearish on XYZ stock and expect it to fall in the near term.

Possible strategy:  Bear Put Spread

                                  Buy 1 XYZ August 40 strike Put at $3.50

                                  Sell 1 XYZ August 35 strike Put at $1.00

                                                                         Net Debit $2.50

 

*All values shown are at the time of expiration. Commissions and other trading fees not included.

Stock

Long 40 Put

Short 35 Put

Net Profit (Loss)

45

($3.50)

$1.00

($2.50)

40

($3.50)

$1.00

($2.50)

 37.5

($1.00)

$1.00

$0

35

$1.50

$1.00

$2.50

30

$6.50

($4.00)

$2.50

 

 

 At Expiration:

  • Maximum Profit = Difference in Strike Prices - Net Debit
  • Maximum Profit = 40 - 35 - $2.50 = $2.50
  • Breakeven = Higher Strike Price - Net Debit
  • Breakeven = 40 - $2.50 = $37.50
  • Maximum Loss = Net Debit
  • Maximum Loss = $2.50 ($250)

In Summary: The Bear Put Spread is an option strategy that can be placed when you think the stock may go down in price in the near future.  By selling an out-of-the-money Put you are reducing your cost to execute a bearish position but the trade-off is that you are limiting your profit potential.