What Does “Bear Put Spread” Mean?
Bear Put Spread is the spread used when the traders expect a fall in rates of underlying asset. The strategy involves purchase of put option at a particular strike price and sale of equal number of put options at a strike price lower than that. The difference in the amount of two different strike prices less the cost of options becomes the highest level of profit with this strategy.
How Does “Bear Put Spread” Applied in Options Market?
An example to understand this better: Assume that a security is currently trading at $50. There is a purchase by an investor for a put option contract at strike price of $55 with $675 (i.e. $6.75* 100 shares/contract) as the cost and also there is a sale of a put option contract having strike price $50 for cost of $375 (i.e. $3.75*100). Hence, if the rate of underlying closes lower than $50 on expiry, the investor gains $200 [(($55-$50) *100 shares/contract) – ($675-$375)].
Tags: Bear Put Spread, put option, strike price
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