Bear Put Spread: Bearish Options Strategy

The bear put spread is the go-to options strategy for traders who expect a stock to decline. It offers defined risk, costs less than buying puts outright, and profits from downward price movement. This comprehensive guide teaches you how to trade bear put spreads effectively.

What is a Bear Put Spread?

A bear put spread is a vertical spread that involves buying a put option at a higher strike price and simultaneously selling a put option at a lower strike price. Both options share the same expiration date. Because the higher strike put costs more than the lower strike put you sell, this is a debit spread - you pay to enter the position.

How to Construct a Bear Put Spread

Setting up a bear put spread requires two simultaneous transactions:

• Buy to open: Purchase a put at a higher strike price (typically at-the-money or slightly in-the-money)
• Sell to open: Sell a put at a lower strike price (your downside target)
• Both options must have the same expiration date
• The net cost is your maximum risk

Profit and Loss Calculations

Know exactly where your trade makes or loses money:

Maximum Profit

Maximum profit occurs when the stock closes at or below the lower strike price at expiration. The formula is:

• Max Profit = (Higher Strike - Lower Strike) - Net Debit Paid

Using our example: ($250 - $230) - $7.50 = $12.50 per share or $1,250 per contract.

Maximum Loss

Maximum loss occurs when the stock closes at or above the higher strike price at expiration. You lose your entire initial investment:

• Max Loss = Net Debit Paid

In our example, this is $7.50 per share or $750 per contract.

Breakeven Point

The breakeven is where you neither make nor lose money:

• Breakeven = Higher Strike - Net Debit Paid

In our example: $250 - $7.50 = $242.50. The stock needs to fall at least $7.50 for you to break even.

When to Use a Bear Put Spread

Bear put spreads work best in specific scenarios:

• Moderately bearish outlook: You expect the stock to decline but have a target level in mind
• Want defined risk: You want to know your maximum loss upfront
• Reduce cost: Buying puts outright is expensive, especially on high-priced stocks
• High IV environment: The short put helps offset the cost of expensive options
• Earnings plays: When you expect a negative reaction but want protection from IV crush
• Hedging: Protect long stock positions during uncertain periods

Choosing Strike Prices

Strike selection dramatically impacts your results:

Long Put Strike (Higher)

• ATM (at-the-money): Higher cost, higher delta, more responsive to price changes
• ITM (in-the-money): Even higher cost, even higher delta, starts with intrinsic value
• Slightly OTM: Lower cost, lower probability, needs more movement

Short Put Strike (Lower)

• Narrow width ($5-10): Lower cost, lower max profit, higher probability of some profit
• Wide width ($15-20+): Higher cost, higher max profit, needs bigger move

Greeks and the Bear Put Spread

Understanding how Greeks affect your bearish position:

• Delta: Negative. Position benefits from downward movement. Net delta is the difference between the two puts.
• Theta: Usually slightly negative. Time decay hurts debit spreads, though less than long puts alone.
• Vega: Can be positive or negative, usually small. The long and short options largely offset each other.
• Gamma: Positive near the long strike, negative near the short strike.

Managing Your Bear Put Spread

Active management improves your overall results:

Taking Profits Early

Consider closing when you have captured 50-75% of maximum profit. If your max profit is $12.50 and the spread is now worth $9.00, that is 72% - a good time to close.

Cutting Losses

Set a mental stop at 50% of your maximum loss. If you paid $7.50 and the spread is now worth $3.75, consider closing to preserve capital.

Rolling Down

If the stock drops quickly to your short strike, you can roll down by closing your spread and opening a new one at lower strikes to capture additional downside.

Time Management

Debit spreads suffer from time decay. If the stock has not moved as expected with two weeks left, consider closing to avoid further theta erosion.

Bear Put Spread vs Buying Puts

How does the spread compare to simply buying puts?

• Cost: Bear put spread costs significantly less
• Risk: Both have defined risk; the spread risks less capital
• Profit potential: Long put profits increase all the way to zero; spread is capped
• Breakeven: Spread has a higher breakeven (needs less movement)
• Time decay: Spread is less affected by theta
• Volatility: Spread is less affected by IV changes

Bear Put Spread vs Bear Call Spread

Both are bearish strategies, but they differ:

• Bear put spread (debit): Pay to enter, need stock to move down, time works against you
• Bear call spread (credit): Receive money to enter, can profit from sideways action, time works for you

Choose the debit spread when you have a strong conviction the stock will drop. Choose the credit spread when you just want the stock to stay below a certain level.

Common Mistakes to Avoid

• Buying too far OTM: Starting with an OTM long put reduces cost but also reduces probability of profit
• Ignoring time frame: Debit spreads need time to work but suffer from decay; 30-45 days is often optimal
• Setting unrealistic targets: Do not sell puts so far out-of-the-money that you rarely hit max profit
• Holding through earnings: Unless earnings is your thesis, the IV crush can hurt even correct directional trades
• Ignoring the trend: Bear put spreads against strong uptrends have low success rates

Summary

The bear put spread is the ideal strategy for traders with a bearish outlook who want defined risk and lower capital requirements than buying puts alone. By selling a lower strike put, you reduce your cost and raise your breakeven point, though your profit is capped at the lower strike. Focus on realistic targets, manage the position actively, and consider taking profits at 50-75% of maximum gain. This strategy works best in neutral to declining volatility environments when you have a specific downside target in mind.

Learn more: vertical spreads, bull call spreads, and bear call spreads.