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.
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The maximum profit is equal to the distance between the strikes, less the premium paid. The loss is limited to the premium paid.
With the market looking a bit toppy here, it could be a good idea to add some bearish trades to your options portfolio.
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 first item in the table – a bear put spread on Amazon (AMZN).
Amazon Bear Put Spread Example
Using the August 21 expiry, this trade involves buying the $265 put and selling the $260 put.
The price for the trade is $1.40 which means the trader would pay $140 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:
5 – 1.40 x 100 = $360.
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 $261.40.
The Barchart Technical Opinion rating is a 72% Buy with a Weakening short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Coinbase Bear Put Spread Example
The next stock in the list is Coinbase (COIN) example is also using the August 21 expiry and involves buying the $175 strike put and selling the $170 strike put.
The cost of the trade is $140, which is also the maximum loss with the maximum possible gain being $360. The maximum gain would occur if Coinbase stock closes below $170 on the expiration date.
The Barchart Technical Opinion rating is an 88% Sell with a Strongest short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Let’s look at another example, this time on Netflix (NFLX).
Netflix Bear Put Spread Example
The Netflix example is using the August 21 expiry and involves buying the $85 strike put and selling the $83 strike put.
The cost of the trade is $60 which is also the maximum loss with the maximum possible gain being $140. The maximum gain would occur if Netflix stock closes below $83 on the expiration date.
The Barchart Technical Opinion rating is a 88% Sell with a Strongest short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Relative Strength just crossed below 30%. The market has entered oversold territory.
Mitigating Risk
Thankfully, bear put spreads are risk defined trades, so they have some build in risk management. The most the Amazon example can lose is $140 while the Coinbase example can lose $140 and the Netflix trade has risk of just $60.
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.
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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