A bear put spread is a vertical spread that aims to profit from a stock declining in price. It has a bearish directional bias as hinted in the name. Unlike the bear call spread, it suffers from time decay so traders need to be correct on the direction of the underlying and also the timing.
A bear put spread is created through buying an out-of-the-money put and selling a further out-of-the-money put.
The maximum profit is equal to the distance between the strikes, less the premium paid. The loss is limited to the premium paid.
With the market looking a bit volatile here, it could be a good idea to add some bearish trades to your options portfolio.
Let’s take a look at Barchart’s Bear Put Spread Screener for today:
Some interesting trades here with impressive Max Profit Percentage.
Let’s strengthen our bearish screener by adding a parameter for any stock with a Sell rating greater than 40%. Here are the results:
Let’s take a look at the first item in the table – a bear put spread on Meta Platforms (META).
Starbucks Bear Put Spread Example
Using the April 17 expiry, this trade involves buying the $640 put and selling the $620 put.
The price for the trade is $12.50 which means the trader would pay $1,250 to enter the trade. This is also the maximum loss. The maximum gain be calculated by taking the width between the strikes and subtracting the premium paid:
20 – 12.50 x 100 = $750.
The breakeven price for the trade is equal to the long put strike, less the premium. In this case, that gives us a breakeven price of $627.50.
The Barchart Technical Opinion rating is a 72% Sell with a Strongest short term outlook on maintaining the current direction.
Of the 55 Analysts following META there are 44 Strong Buy, 3 Moderate Buy and 8 Hold recommendations.
Oracle Bear Put Spread Example
The first Oracle (ORCL) example is also using the April 17 expiry and involves buying the $190 strike put and selling the $185 strike put.
The cost of the trade is $330, which is also the maximum loss with the maximum possible gain being $170. The maximum gain would occur if stock closes below $190 on the expiration date.
The Barchart Technical Opinion rating is an 88% Sell with a Strongest short term outlook on maintaining the current direction.
Of the 41 Analysts following ORCL there are 29 Strong Buy, 1 Moderate Buy, 10 Hold and 1 Strong Sell ratings.
Let’s look at another example, this time on Trade Desk (TTD).
Trade Desk Bear Put Spread Example
The Trade Desk example is using the June 18 expiry and involves buying the $37.50 strike put and selling the $35 strike put.
The cost of the trade is $180 which is also the maximum loss with the maximum possible gain being $70. The maximum gain would occur if Trade Desk stock closes below $35 on the expiration date.
The Barchart Technical Opinion rating is a 100% Sell with a Strongest short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Relative Strength just crossed below 30%. The market has entered oversold territory.
Of the 39 Analysts following TTD there are 18 Strong Buy, 3 Moderate Buy, 15 Hold, I Moderate Sell and 2 Strong Sell ratings.
Mitigating Risk
Thankfully, bear put spreads are risk defined trades, so they have some build in risk management. The most the META example can lose is $1,250 while the ORCL example can lose $330 and the TTD trade has risk of $180.
For each trade consider setting a stop loss of 30% of the max loss.
Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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