Bear Put Spreads - Make Money From Falling Prices

Exactly what is the difference between bear put spreads and bear call spreads, for instance? Do you understand why they've each been given that name? This article is all about getting our options trading terminology correct.

Here's how it goes.

The first word in the phrase indicates your perception of the market. So a bear put spread would indicate that you think the underlying stock under consideration is about to experience a price drop. To put it differently, you're bearish on the stock, so your vertical spread strategy will exhibit that.

The subsequent part of the term indicates not only the type of spread you plan to do, but once combined with the bearish nature of your view of the stock, the fact that it will be a debit spread (not a credit spread). If you were doing a credit spread, you would want the underlying to stay away from the spread strike prices until option expiry date in order for it to be profitable. But for a debit spread you'd ideally like it to plunge through both strike prices for optimum profit.

Bear put spreads are option debit spreads that are structured by purchasing put options having a strike (exercise) price which is near to the current market valuation on the share ... and simultaneously selling the exact same number of put options at an exercise price which is lower than the bought options. Considering that the bought options will be more valuable (being closer to the money) than the sold ones, the net result is a debit to your brokerage account - consequently, the "debit spread" aspect of the trade.

Since we get into put debit spreads on the assumption that we can make considerable gain if the underlying price falls, they provide an opportunity of entering a larger number of option positions at less cost than merely buying (going long) puts. They furthermore permit greater flexibility should the underlying price temporarily go against us, in that we might contemplate buying back the 'sold' position for a fraction of what we sold it, hoping that should the stock return to its downward trend, we can profit from the remaining bought put option, which we now own at a massive discount.

Bear Put Spreads must be distinguished from bear call spreads. Bear Call Spreads are credit spreads, again the result of a bearish view of the market but consisting of call options (not put options) in the hope that the underlying stock will remain away from their strike prices.