Bear Put Spreads – Vertical Bear Puts

Bear Put Spreads – Vertical Bear Puts

Bear Put Spreads or as they are also called Vertical Bear Puts are a popular option strategy and one that you will probably do quite often once you start trading.


The concept is simple; buy a Put and sell a Put with a lower strike price. This will always result in a debit to your account (you will have to pay money to place the trade).


A Bear Put Spread, as the name implies, is a bearish position using Puts and can be profitable if the market drops in price. Spreads may not always be profitable even if the price goes down. It will depend on several factors, such as which strike prices were bought and sold and how much the price goes down, and where it closes at option expiration.


Why would you want to do something that takes money out of your account and creates a debit? The simple answer is that it will reduce the risk on the trade. Always remember that when you have a debit to your account you should be reducing the risk on the trade and anytime you have a credit to your account you could be increasing risk but getting some cash in your account. Let’s look at Figure 6.17

Here, we are looking at buying a 111.00 Put for $1,365 and at the same time selling a 106.00 Put for $487.50. This of course is a debit spread since you spent more money than you collected. In this case, you spent $1,362.50 and collected $487.50 resulting in a debit of $875.00. Now I know what you are thinking; that with our $10,000 account we can only take a $500 risk and you’re right. But $875.00 is the debit, not the risk. Debit and Risk are two different things, and you don’t have to risk but $500 on the trade. So, if the trade goes against us by $500, we can just exit the trade. Look at figure 6.18.

As you can see the price did in fact drop and at expiration it was below the strike price of the option we sold. As a result, we made the most on this trade that was possible which is the difference between the two strike prices less the debit. You can see on the left under “Account Balance” that the account was up to $11,650, so we have a profit of $1,650 (we started with $10,00).


But hold on David, how would it have affected our profits if the price at expiration was at say 105.90? Would the option we sold have expired worthless? Would we have made more money, the same money, or less money? Well, I’m not going to tell you. I want you to THINK this through on your own. You have to learn to think about the ramifications of EVERY trade you put on.


Of course, on every trade you do, you must figure out your Risk/Reward ratio before you place the trade. If you don’t have at least a 2:1 ratio, then don’t place the trade. On this one, it’s easy. Even though we had a debit of $847.50 we planned on taking only a $500 risk. Now the most that we could make is the difference between the two strikes less the debit. In this case, it’s $1,652.50 and with a $500 risk, it’s a little over a 3:1 Risk/Reward ratio.

Watch The Video