What is a 'Bear Spread'

A bear spread is an option strategy seeking maximum profit when the price of the underlying security declines. The strategy involves the simultaneous purchase and sale of options; puts or calls can be used. A higher strike price is purchased and a lower strike price is sold. The options should have the same expiration date.

BREAKING DOWN 'Bear Spread'

A bear spread is also a trading strategy used by futures traders who intend to profit from the decline in commodity prices while limiting potentially damaging losses. In an options bear spread, the options position makes money if the underlying goes down and loses if the underlying rises in price. A futures bear spread is created through the simultaneous purchase and sale of two of the same or closely related futures contracts. This is accomplished in the agricultural commodity markets by selling a future and offsetting it by purchasing a similar contract with an extended delivery date.

Bear Put Spread Example

Assume an investor is bearish on stock XYZ when it is trading at $50 per share and believes the stock price will decrease over the next week. The investor purchases 10 put options with a strike price of $55 and writes 10 put options with a strike price of $45, which expire the next week for a combined total of $3,500. Therefore, the investor's maximum loss is the amount paid to implement the position, and the maximum profit is limited to the strike price of the long put less the strike price of the short put and the net premium paid. Assuming options have a contract size of 100, the maximum profit of the position is $6,500, or ($55 * 10 * 100) - ($45 * 10 * 100) - $3,500. In this bear put spread, the maximum profit is achieved if stock XYZ trades below the strike price of the short put, or $45. The breakeven point of a bear put spread is equivalent to the strike price of the long put option less the net premium paid.

Futures Bear Spread

Assume an investor is bearish on the Standard & Poor's 500 Index (S&P 500) when it traded at 2,000. The investor believes the S&P 500 will fall in the short term but rebound over the long term. Therefore, the investor creates a bear spread by selling short one S&P 500 futures contract expiring in six months for 1,995, and simultaneously purchases one S&P 500 futures contract expiring the next year for 1,997.

RELATED TERMS
  1. Bear Put Spread

    A bear put spread is a bearish options strategy used to profit ...
  2. Bull Put Spread

    A type of options strategy that is used when the investor expects ...
  3. Bear Call Spread

    A bear call spread is a bearish options strategy used to profit ...
  4. Bull Spread

    A bull spread is a bullish options strategy using either two ...
  5. Vertical Spread

    A vertical spread strategy uses purchases and sales of the same ...
  6. Strike Price

    The price at which a specific derivative contract can be exercised. ...
Related Articles
  1. Trading

    Bear Put Spreads: An Alternative to Short Selling

    This strategy allows you to stop chasing losses when you're feeling bearish.
  2. Trading

    What is a Bear Put Spread?

    A bear put spread entails the purchase of a put option and the simultaneous sale of another put with the same expiration but a lower strike price.
  3. Trading

    What is a Bear Call Spread?

    A bear call spread is an option strategy that involves the sale of a call option, and the simultaneous purchase of a call option (on the same underlying asset) with the same expiration date but ...
  4. Trading

    Vertical Bull and Bear Credit Spreads

    This trading strategy is an excellent limited-risk strategy that can be widely used.
  5. Trading

    What Is A Bull Put Spread?

    Investopedia explains: A bull put spread is a variation of the popular put writing strategy, in which an options investor writes a put on a stock to collect premium income and perhaps buy the ...
  6. Personal Finance

    Tips for Answering Series 7 Options Questions

    We'll show you how to ace the largest and most difficult section of this exam.
  7. Trading

    Options Strategies for Your Portfolio to Make Money Regularly

    Discover the option-writing strategies that can deliver consistent income, including the use of put options instead of limit orders, and maximizing premiums.
  8. Trading

    The Butterfly Spread

    A butterfly spread is a neutral options strategy with both limited risk and limited profit potential. The strategy involves four options contracts with the same expiration month but with three ...
  9. Trading

    Option trading strategies: A guide for beginners

    Options offer alternative strategies for investors to profit from trading underlying securities. Learn about the four basic option strategies for beginners.
  10. Trading

    The Basics of Options Profitability

    Learn the various ways traders make money with options, and how it works.
RELATED FAQS
  1. What is the difference between in the money and out of the money?

    Learn how the difference between in the money and out of the money options is determined by the relationship between strike ... Read Answer >>
  2. What is index option trading and how does it work?

    Learn about stock index options, including differences between single stock options and index options, and understand different ... Read Answer >>
  3. How do I change my strike price once the trade has been placed already?

    Learn how the strike prices for call and put options work, and understand how different types of options can be exercised ... Read Answer >>
  4. What option strategies can I use to earn additional income when investing in the ...

    Learn about a couple of good options strategies that traders can use to enhance investing profitability when investing in ... Read Answer >>
  5. How is a short call used in a collar option strategy?

    Learn how a short call is used in a collar option strategy, and see how this strategy has a limited risk and a limited return ... Read Answer >>
Hot Definitions
  1. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  2. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  3. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  4. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
  5. Interest Coverage Ratio

    The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest ...
  6. Cash Conversion Cycle - CCC

    Cash conversion cycle (CCC) is a metric that expresses the length of time, in days, that it takes for a company to convert ...
Trading Center