What is a 'Bear Put Spread'
A bear put spread is a type of options strategy used when an option trader expects a decline in the price of the underlying asset. Bear Put Spread is achieved by purchasing put options at a specific strike price while also selling the same number of puts at a lower strike price. The maximum profit to be gained using this strategy is equal to the difference between the two strike prices, minus the net cost of the options.
BREAKING DOWN 'Bear Put Spread'
For example, let's assume that a stock is trading at $30. An option trader can use a bear put spread by purchasing one put option contract with a strike price of $35 for a cost of $475 ($4.75 * 100 shares/contract) and selling one put option contract with a strike price of $30 for $175 ($1.75 * 100 shares/contract). In this case, the investor will need to pay a total of $300 to set up this strategy ($475 - $175). If the price of the underlying asset closes below $30 upon expiration, then the investor will realize a total profit of $200 (($35 - $30 * 100 shares/contract) - ($475 - $175)).