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.
Benefits of the Bear put spread and why is it made?
So, let us understand it in simple language, whenever there is a selling situation in the market, it is called a stock market recession. So, in such a situation, we buy a put option, but if there is a little short covering in the market or there is not much decline in the market, then in such a situation the value of the premium of the put option will decrease due to time value “Theta”. We can either suffer loss or be unable to make a good profit. In this way, to save the loss or to trade safely, “out the money” Put Option is sold, so that the loss can be saved.
How to make Bear put spread?
Bear put spread to make this, we will have to take the help of option chain, through which we can easily understand which strike we have to buy and which strike we have to sell.
As shown in the option chain above, Nifty is trading at 20906 and I think the market may turn bearish from here, so I will buy 20900 put option. If Nifty closes below 20800 before expiry, I will not suffer a loss. But the price of 20900PE is ₹69.45, due to which I will make a profit if Nifty closes below 20800, but if Nifty closes around 20900, I may lose ₹69.45. So, to save the loss caused by this, I will sell “out the money” Put option. So here the price of the put option of 20800 is ₹34.80 and if Nifty does not go below 20800, then I will make a full profit of ₹34.80 & small profit from 20900PE. If nifty closes near 20900, I will make a small profit from the put option of ₹34.80, 20800PE, Making a loss in the 20900PE option of ₹69.45.
What will be the target and stop loss and how much money will be required?
(PAID PREMIUM) BUY POSITION = PREMIUM PRICE OF 20900PUT ₹69.45
(RECEIVED PREMIUM) SELL POSITION = PREMIUM PRICE OF 20800PUT ₹34.80
TOTAL PREMIUM = 69.45-34.80 = 34.65 (MAXIMUM LOSS POINT)
STRIKE DIFFERENCE= 20900-20800 = 100-34.80=65.20 (MAXIMUM PROFIT POINT)
image for the bear spread
If Nifty closes below 20800 before expiry, then the maximum profit will be 65.20 points. But if Nifty closes above 20900, there will be a maximum loss of 34.65 points.
Even, if Nifty closes around 20900, the put option at 20900 will result in a complete loss of 69.45 points, and the put option at 20800 will result in a profit of ₹34.65. So, the loss in this way will be 34.80 points, but if Nifty expiry is near 20800, then the price of 20900 put option will be around ₹100. There will be a profit of 30 points and the price of the put option of 20800 will go to zero, there will be another profit of ₹34.80. In bear put spread both the profit and the loss are estimated in advance.
Bear put spread to make in Nifty option and Fin Nifty option around 20-30k funds required, Whereas in Bank Nifty option, the fund utilization is around ₹25-35K and also depending on the strike price and days left to expiry, the fund utilization varies more or less.
NOTE: - For Bear put spread, 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.