• # Put Bear Spread Trading Strategy

Put Bull spread trading strategy consists of two Put option positions (One Sell and one Buy) at the same time. Here the trader sells one put option with a lower exercise price XL and buys another put option with a higher exercise price XH. For the first option he receives premium of PL and for the second options he pays premium of PH.

Here PH > PL, as XH > XL

Suppose for this case,

XL = USD 100; XH = USD 150

PL = USD 10; PH = USD 20

Current Share Price, S0 = USD 80

Net Premium Paid = USD (20-10) = USD 10

Maximum Loss happens when the stock price goes above the higher strike price range (XH = 150 USD) as here both the Put options will be expired and the maximum loss will be limited to the net amount paid for the spread. The maximum loss will be equal to the net premium paid which is USD 10.

Maximum Profit happens when the share price goes below the lower strike price range (XL = 100 USD) as below that both the put options will be in the money and the maximum profit will be the difference between the two strike prices minus the net premium paid which is = (XH – XL) – (PH-PL) = USD (50-10) = USD 40

Breakeven price is the share price where the profit stood at 0 and it separates profit from loss. Here the breakeven price would be = 150-10 = USD 140, where profit from buy put option will be same as loss incurred from premium. The breakeven price can easily be determined from the table and the chart.

The following table shows the profit/loss scenarios for different share prices.

The below chart shows the profit/loss for the trading strategy option with the movement of the share price.

Put Bear Spread Chart

Here we have three graphs

1. Profit/Loss from Buying Put option at strike price XH
2. Profit/Loss from Selling Put option at strike price XL
3. Total Profit/Loss

Put Bear Spread trading strategy is used when the trader is bearish on market direction. A Put Bear Spread has the same payoff as the Call Bear Spread as both strategies hope for a decrease in market prices. However in Put Bear, the trader will have to pay an initial cost in the form of the net premium unlike Call Bear where there is an initial income of net premium.

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