Tim Olson
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33 lines
1.5 KiB
Markdown
33 lines
1.5 KiB
Markdown
---
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description: "A bearish vertical spread buying a near-ATM put at K1 and selling a lower-strike OTM put at K2 < K1 for a net debit, profiting if the stock falls toward K2."
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tags: [options, speculation, bearish, vertical-spread]
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---
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# Bear Put Spread
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**Section**: 2.9 | **Asset Class**: Options | **Type**: Speculation
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## Overview
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The bear put spread is a vertical spread consisting of a long position in a close to ATM put option with strike K1, and a short position in an OTM put option with a lower strike K2 (K2 < K1). This is a net debit trade. The trader's outlook is bearish: the strategy profits if the stock price falls. This is a capital gain strategy.
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## Construction
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- Buy 1 put option at strike K1 (near ATM), paying debit D
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- Sell 1 put option at strike K2 (OTM lower, K2 < K1), same expiry
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Net debit: D = premium paid for K1 put - premium received for K2 put
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## Payoff Profile
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f_T = (K1 - S_T)+ - (K2 - S_T)+ - D
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- Breakeven: S* = K1 - D
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- Max profit: P_max = K1 - K2 - D (achieved when S_T <= K2)
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- Max loss: L_max = D (if S_T >= K1 at expiry)
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## Key Conditions / Signals
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- Moderately bearish outlook; expects stock to fall toward or below K2 by expiry
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- Prefer when implied volatility is low (cheaper debit to enter)
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- Lower cost and lower risk than buying a naked put; downside profit is capped at K2
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## Notes
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Both profit and loss are limited. The maximum gain equals the spread width minus the net debit. Appropriate when the trader has a bearish view but wants to reduce the premium outlay compared to a simple long put.
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