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 Nvidia (NVDA).
Nvidia Bear Put Spread Example
Using the December 18 expiry, this trade involves buying the $235 put and selling the $225 put.
The price for the trade is $7.75 which means the trader would pay $775 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 – 7.75 x 100 = $225.
The breakeven price for the trade is equal to the short put strike, plus the premium. In this case, that gives us a breakeven price of $227.25.
The Barchart Technical Opinion rating is a 40% Buy with a Weakest short term outlook on maintaining the current direction.
TSM Bear Put Spread Example
The next stock in the list is Taiwan Semiconductor (TSM) example is using the January 15 expiry and involves buying the $440 strike put and selling the $430 strike put.
The cost of the trade is $760, which is also the maximum loss with the maximum possible gain being $240. The maximum gain would occur if Taiwan Semiconductor stock closes below $430 on the expiration date.
The Barchart Technical Opinion rating is a 40% Buy with a Weakest short term outlook on maintaining the current direction.
Let’s look at another example, this time on Tesla (TSLA).
Tesla Bear Put Spread Example
The Tesla example is using the December 18 expiry and involves buying the $390 strike put and selling the $365 strike put.
The cost of the trade is $1,945 which is also the maximum loss with the maximum possible gain being $555. The maximum gain would occur if Tesla stock closes below $365 on the expiration date.
The Barchart Technical Opinion rating is a 88% Sell with a Strengthening short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Mitigating Risk
Thankfully, bear put spreads are risk defined trades, so they have some build in risk management. The most the Nvidia example can lose is $775 while the Taiwan Semiconductor example can lose $760 and the Tesla trade has risk of $1,945.
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 had a position in: NVDA . 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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