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Bear Put Spread
When your feeling on a stock is generally negative, bear spreads are
nice low risk, low reward strategies. One of the easiest way to create a
bear spread is by using put options at or near the current market price of
the stock.
Like bear call spreads, bear put spreads profit when the price of the
underlying stock decreases. Bear put spreads are typically created by
buying at-the-money puts and selling out-of-the-money puts.
Example
Using Altria Group (MO),
we can create a bear put spread using in-the-money options. With MO
Trading at $56.78 in May, you might buy ten of the JUL 60 puts
and sell ten JUL 55 puts.
In this case, the maximum profit would be the difference between the
strike prices less the $3,000 it cost to put on the position. In this
case, the maximum profit works out to $2,000 ((60 - 55 x 1,000) - $3,000).
In contrast, the maximum loss would be limited to the $3,000 spent
initiating the trade. Once again, this maximum loss is the amount used to
calculate the ROI.
| MO
trading @ $56.89 |
| Buy 10 |
JUL 60 Put @
$4.00 |
$4,000 |
| Sell 10 |
JUL 55 Put @
$1.00 |
($1,000) |
| Cost of Trade |
$3,000
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