A bear put spread is a vertical spread created by buying a put option (long put) at a higher strike price, and selling a put option (short put) at a lower strike price. Both the put options – long and short – must have the same expiration date. In example below, we are buying a $150 Strike Price put and selling a $130 Strike Price put. Both have the same expiration date of January 21, 2022, and the strike spread is $20 (i.e. $150 – $130).
Is Bear Put Spread a Net Debit or Net Credit spread?
A Bear Put Spread is a Net Debit spread.
Since we sell a lower strike put (which is cheaper) and buy a higher strike put (which is more expensive), on a net basis pay money to create a bear put spread. In the example shown above, we can sell the $130 strike put and collect $4.75 per share (or $475 for the contract of 100 shares), and we pay $12.21 per share (or $1,221 for the contract of 100 shares) for buying the $150 strike put.
On a net basis, we’ll pay $12.21 – $4.75 = $7.46 to create this bear put spread, hence it is a net debit spread.
Net debit = $7.46 per share, or $746 for the spread.
What is the Maximum Profit in a Bear Put Spread?
The maximum profit in a bear put spread = Strike Spread – |Net Debit|
In this case, maximum profit = $20 – 7.46 = $12.54 per share, or $1,254 for the spread.
What is the Maximum Loss in a Bear Put Spread?
The maximum loss in a bear put spread = Net Debit
In this case, maximum loss = $7.46 per share, or $746 for the spread.
What is the Breakeven Point of a Bear Put Spread?
The breakeven point of a bear put spread = Higher Strike Price (i.e. of Long Put) – |Net Debit|
In this case, breakeven point = $150 – $7.46 = $142.54.
Bear Put Spread – Zones of Profit and Loss
Both the maximum profit and maximum loss are observed between the higher and lower strike prices of the bear put spread. The maximum profit is capped at the point when the stock price is at the lower strike price. The maximum loss is contained at the point when the stock price rises to the higher strike price. There is one breakeven point and (mostly) it lies in between the two strike prices.
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