Bear Put Spread
碩財二甲 MA080104 陳俊諺
When to Use a Bear Put Spread
Moderately Bearish
An investor often employs the bear put spread
in moderately bearish market environments,
and wants to capitalize on a modest decrease in
price of the underlying option. If the investor's
opinion is very bearish on a option it will
generally prove more profitable to make a
simple put purchase.
How a Bear Put Spread Works
Bear Put Spread
= Long Put (At a higher strike) +
Short Put (At a lower strike)
Establishing a bear put spread involves the purchase of a
put option on a particular underlying stock, while
simultaneously writing a put option on the same underlying
stock with the same expiration month, but with a lower
strike price. Both the buy and the sell sides of this
spread are opening transactions, and are always the same
number of contracts.
Max Gain
Max Gain
The maximum gain is limited. The best that can happen is for
the option price to be below the lower strike at expiration.
The upper limit of profitability is reached at that point, even
if the stock were to decline further. Assuming the option price
is below both strike prices at expiration, the investor would
exercise the long put component and presumably be assigned on
the short put. So,the option is sold at the higher (long put
strike) price and simultaneously bought at the lower (short put
strike) price. The maximum profit then is the difference
between the two strike prices, less the initial outlay (the
debit) paid to establish the spread.
Max Loss and Breakeven
Max Loss
The maximum loss is limited. The worst that can
happen at expiration is for the option to be above
the higher (long put) strike price. In that case,
both put options expire worthless, and the loss
incurred is simply the initial outlay for the
position (the debit).
Breakeven
This strategy breaks even if, at expiration, the stock price is
below the upper strike by the amount of the initial outlay (the
debit). In that case, the short put would expire worthless,
and the long put's intrinsic value would equal the debit.
Breakeven = long put strike - net debit paid
Conclusion
Maximum Loss = 56
Maximum Profit = 114
Breakeven Point = 7644