BEAR PUT SPREAD

“Bear put spread”, as the name suggests, bear means the bearish environment in the Share market, and put spread meaning, it has been created by combining two put options. Whenever there is a bearish situation in the market, “in the money” or “at the money” put option is purchased and “out the money” option is sold. The position created in this way is called a “Bear put spread” Option strategy.

How to work Bear Put Spread?

A bear put spread involves buying one put option and selling another put option with a lower strike price, both with the same expiration date. Here's how it works:

1. Buy a put option with a higher strike price near the “at the money” option.

2. Sell a put option with a lower strike price full “out the money” option.

3. Both options have the same expiration date.

What are the advantages of the “Bear Put Spread” strategy?

There are several reasons why traders like using the bear put spread strategy:

1. Limited risk: Your maximum loss is capped at the net premium paid only.
2. Lower cost: Selling the lower strike put helps offset the cost of buying the higher strike put option.
3. Defined profit potential: You know your maximum profit upfront.
4. Flexibility: You can adjust the strike prices based on your market sentiment.

When I first learned about this strategy, I was amazed at how it could provide a balance between potential profit and risk management.

Disadvantages of “Bear Put Spread” strategy?

Of course, no strategy is 100% sureshot. Here are some drawbacks to consider:

1. Limited profit potential: Your gains are capped, unlike a straight-put purchase.
2. Requires higher capital for trade: You'll need to have enough money to buy the higher-priced put option.
3. Time decay: Both options lose value as expiration approaches.
4. Complexity: It's more complicated than simply buying or selling a single option.

When should you use the “Bear Put Spread” option strategy?

1. When you expect a moderate decline in the stock price.

2. If you want to limit your potential losses.

3. When you're looking for a less expensive alternative to buying puts outright.

4. If you're comfortable with capped profit potential in exchange for lower risk.

How do you make a bear put spread option strategy?

As shown in the option chain above, Nifty is trading at 23951 and I think the market may turn bearish from here, so I will buy the 23950PE option. If Nifty closes below 23900 before expiry, I will not suffer a loss. But the price of 23950PE is ₹178, due to which I will make a profit if Nifty closes below 23800, but if Nifty closes around 20900, I may lose ₹120. So to save the loss caused by this, I will sell the “out the money” option. So here the price of the put option of 23800 is ₹119 and if Nifty does not go below 23800, then I will make a profit of ₹119 from the 23800PE option & small loss from 23950PE.
 

What will be the target and stop loss and how much money will be required?

(PAID PREMIUM) BUY POSITION = PREMIUM PRICE OF 23950PE ₹178
(RECEIVED PREMIUM) SELL POSITION = PREMIUM PRICE OF 23800PE ₹119

TOTAL PREMIUM = 178-119 = 59  (MAXIMUM LOSS POINT)
STRIKE DIFFERENCE= 23800PE (SOLD) - 23950PE (BOUGHT)= 150 Point

OPTION PREMIUM DIFFERENCE= 178-119 =59

MAXIMUM PROFIT POINT = 150-59= 91 POINT
 

If Nifty closes below 23800 before expiry, then the maximum profit will be 91 points. But if Nifty closes above 23950, there will be a maximum loss of 59 points.

Even, if Nifty closes around 23950, the put option at 23950 will result in a complete loss of 178 points, and the put option at 23800 will result in a profit of ₹119. So the loss in this way will be 59 points, but if the Nifty expiry is near 23800, then the price of the 23950 put option will be around ₹150. There will be a loss of 28 points and the price of the put option of 23800 will go to zero, there will be a profit of ₹119, and the final profit will be 119-28=₹91. In bear put spread both the profit and the loss are estimated in advance.

Fund required: In the “Bear put spread” to make in Nifty option and Fin Nifty option around 75-80k funds are required, Whereas in the Bank Nifty option, the fund utilization is around ₹75-85K and also depending on the lot size, strike price and days left to expiry, the fund utilization varies more or less. .

NOTE:- To make a “Bear put spread” option strategy, you have to first create a buying position, then create a selling position, but during profit booking, you have to square off the selling position first, then square off the buying position.