Bear Put Spread

Bear Put Spread A bear put spread (also called a debit put spread or long put spread) is an options strategy used when you expect a moderate decline in an underlying asset. It reduces the cost and risk of buying a single put by simultaneously selling a lower-strike put with the same expiration. How it works
* Buy one put option with a higher strike price.
* Sell one put option on the same underlying with a lower strike price and the same expiration.
* The trade is a net debit (you pay to open it).
Key outcomes (per contract = 100 shares)
- Maximum profit = (higher strike − lower strike) − net premium paid.
- Maximum loss = net premium paid.
- Break-even price at expiration = higher strike − net premium paid. Explore More Resources

Setup and payoff example Example 1 (simple numbers)
- Underlying current price: $30.
- Buy 35-strike put for $4.75 ($475).
- Sell 30-strike put for $1.75 ($175).
- Net premium paid = $4.75 − $1.75 = $3.00 ($300 per contract).
- Max profit = (35 − 30) − $3 = $2.00 ($200 per contract).
- Max loss = $3.00 ($300).
- Break-even = 35 − $3 = $32. Example 2 (Levi Strauss)
- Underlying: $50.
- Buy 40-strike put for $4.00.
- Sell 30-strike put for $1.00.
- Net premium = $3.00.
- Break-even = 40 − 3 = $37.
- Max profit = (40 − 30) − 3 = $7.00 per share ($700 per contract).
- Max loss = $3.00 per share ($300 per contract). Explore More Resources

Pros
* Lower upfront cost than buying a single put (premium offset by sold put).
* Defined, limited risk (max loss = premium paid).
* Better risk profile than short-selling (no unlimited upside risk).
Cons
* Profit is capped at the strike differential minus the net premium.
* If the underlying falls significantly beyond the lower strike, you forgo additional profits.
* Potential for early assignment on the short put (especially with American-style options around dividends or corporate events).
* Commissions, slippage, and margin rules can affect net returns.
Risks and practical considerations
* Early assignment: Selling the lower-strike put exposes you to the chance of being assigned early, which can force a stock position or change risk exposure.
* Expiration behavior: The position’s value at expiration depends on where the underlying closes relative to the two strikes:
* At or below the lower strike: full max profit.
* Between strikes: partial profit.
* At or above the higher strike: full loss of the premium paid.
* Transaction costs and bid-ask spreads can materially affect small net premiums.
* Use position sizing consistent with the defined maximum loss.
When to use a bear put spread
* You expect a modest to moderate decline in the underlying before option expiration.
* You want downside exposure with limited, known risk and lower upfront cost than a standalone put.
* You are willing to cap upside in exchange for reduced cost and risk.
Bottom line A bear put spread is a conservative bearish options strategy that limits both potential gains and losses. It is suitable when you forecast a decline but want to control cost and downside exposure. Calculate net premium, break-even, max profit, and max loss before entering the trade, and be mindful of assignment risk and transaction costs.