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 GainThe 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 LossThe 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).BreakevenThis 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 = 56Maximum Profit = 114Breakeven Point = 7644