With the stock market under pressure, 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.
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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:
Some interesting trades here with impressive Max Profit Percentage. Let’s take a look at the second item in the table – a bear put spread on Nvidia (NVDA).
NVDA Bear Put Spread Example
Using the August 21 expiry, this trade involves buying the $220 put and selling the $210 put.
The price for the trade is $6.90 which means the trader would pay $690 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 – 6.90 x 100 = $310.
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 $213.10.
Let’s look at another example. This time on Microsoft (MSFT).
Microsoft Bear Put Spread Example
The first Microsoft bear put spread is also using the August 21 expiry and involves buying the $420 trike put and selling the $415 strike put.
The cost of the trade is $375 which is also the maximum loss with the maximum possible gain being $125. The maximum gain would occur if Microsoft stays below $420 on the expiration date.
Let’s look at another example, this time on Tesla (TSLA).
Tesla Bear Put Spread Example
The Tesla trade is also using the August 21 expiry and involves buying the $410 strike put and selling the $400 strike put.
The cost of the trade is $680 which is also the maximum loss with the maximum possible gain being $320. The maximum gain would occur if Tesla stock stays below $400 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.
Also remember to watch out for earnings dates.
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.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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