Understanding of Bear Put Spread Options Trading Strategy
Education Topics on Derivatives – Futures and Options
Understanding of Bear Put Spread Options Trading Strategy
What is Bear Put Spread?
A Bear Put Spread is an Options Trading Strategy which generally involves two legs ITM (In the Money) or ATM (At the Money) & OTM (Out of the Money) simultaneous buying of ITM / ATM (At the Money) Put Option and simultaneous selling of OTM (Out of the Money) Put option (PE) for the underlying asset with the same expiration date.
Here traditional Bear Put spread involves combination of ATM & OTM Put option however the Bear Put spread can be created by using different strike prices as well.
Key Points to Remember
- Buy 1 Lot ITM Put Option (PE) & Sell 1 Lot OTM Put Option (PE).
- All Strike Prices belongs to same expiration date / same series.
- Remember to buy the same number of lots / legs.
- In a Bear Put Spread a Trader is betting on that underlying have limited moderately bearish and expecting the fall in the price.
- The Bear Put Spread limits the losses at the same time it also limits the gains.
In Bear Put Spread Strategy the premium received by selling the Put option partially offsets the premium paid by the trader while buying the Put option. In this strategy the traders pays the premium of net difference and which is the cost of this strategy.
So now it’s time to understand the Bear Put Spread Strategy with the example
Date: – 28.09.2021
Nifty Spot Price: – 17748.6 (28.09.2021 close price)
So your outlook is moderately Bearish and you are expecting market to go down but expiry around the corner could limit the down side so you are planning for creating a Bear Put Spread
ATM – 17750 PE 30 Sep 2021 – Rs. 94.15
OTM – 17650 PE 30 Sep 2021 – Rs. 50.00s
So Bear Put Spread is as follows
- You are buying 17750 PE by paying Rs. 94.15 & you are paying a premium of Rs. 94.15 X 50
- And Sell 17650 PE at Rs. 50.00, by selling PE here you are collecting a premium of Rs. 50 X50.
- So the Net Difference here is 94.15 – 50 = 44.15 so this 44.15 is you net debit here 44.15 X 50 is your net loss in this strategy.
Max Loss is the net debit paid and hence the Bear Put spread is also called as debit Bear spread.
So let’s have a look on the below payoff chart of the above Bear Put Spread.
The Bear Put Spread Strategy Makes loss if Nifty Expires above 17705, however the loss is restricted to 44.15 X 50 i.e. Max Loss – 2208 (Net Debit).
The Bear Put Strategy breakeven at 17750 – 44.15 = 17705
Max Profit is – 100 – 44.15 = 55.85 X 50 = 2792.50
The above strategy is very popular strategy and most of the traders are using the same as it’s simple to understand and easy to implement moreover the profit and loss are already limited to the maximum. So the trader is well aware about the max profit and max loss. The nifty in the above example may expire in between both the strike prices and according the profit or loss will change however it’s limited.
In the present example of nifty it’s likely that nifty might consolidate or might make a move towards 17650 levels and the risk reward in this strategy is also favorable for the traders so it’s linked with the live example of nifty.
Bear Put Spared you can implement in any of the instruments such as nifty, banknifty, currency, stock options, commodities etc.
I hope the strategy is well clarified for understanding and it’s also simple and you don’t need to look for options Greeks and so on.
Just predict the move and accordingly deploy the strategy, in earlier we have also explained few options trading strategies which can be referred to learn and practice.
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