Understanding Bear Put Spread Options Strategy:
A Thread (🧵) 👇
A Thread (🧵) 👇
What is the Bear Put Spread Options #Strategy?
The investor must buy an in-the-money (higher) put option and sell an out-of-the-money (lower) put option on the same company with the same expiration date in order to execute this strategy👇
The investor must buy an in-the-money (higher) put option and sell an out-of-the-money (lower) put option on the same company with the same expiration date in order to execute this strategy👇
The strategy’s overall effect is to lower the cost of buying a Put and raise the breakeven point (Long Put).
Because the #investor will only profit if the stock price/index declines, the approach requires a bearish perspective. This method comes with low risk and a low profit👇
Because the #investor will only profit if the stock price/index declines, the approach requires a bearish perspective. This method comes with low risk and a low profit👇
How does its work?
Let us take the stock example so that we can understand this strategy better-
Stock Example- Hero MotoCorp Ltd-1.6.2022👇
Let us take the stock example so that we can understand this strategy better-
Stock Example- Hero MotoCorp Ltd-1.6.2022👇
2. Strategy
The Bear Put Spread Strategy involves:
✅Buying Put of Higher Strike Price– According to this example, we can buy 2600 put around 38 of the June Expiry
✅Selling Put of Lower Strike Price- we can sell 2500 put around 22 of the June Expiry👇
The Bear Put Spread Strategy involves:
✅Buying Put of Higher Strike Price– According to this example, we can buy 2600 put around 38 of the June Expiry
✅Selling Put of Lower Strike Price- we can sell 2500 put around 22 of the June Expiry👇
3. Maximum #Gain
In the example above, the difference between the strike prices is 100 (2600 – 2500 = 100), and the net cost of the spread is 16 (38 – 22= 16). Therefore, the maximum profit is 3.10 (100 – 16 = 84) per share less commissions👇
In the example above, the difference between the strike prices is 100 (2600 – 2500 = 100), and the net cost of the spread is 16 (38 – 22= 16). Therefore, the maximum profit is 3.10 (100 – 16 = 84) per share less commissions👇
So, 1 lot of Hero MotoCorp Ltd. is 300 shares, thus, total profit= 300*84= Rs. 25,200
This maximum profit is realized if the stock price is at or below the Short put (lower strike) strike price at expiration👇 in
This maximum profit is realized if the stock price is at or below the Short put (lower strike) strike price at expiration👇 in
Short puts are generally assigned at expiration when the stock price is below the strike price👇
4. Maximum risk
The maximum risk is equal to the spread cost, including commissions. A loss of this amount is realized if the position is held to expiration and both puts expire worthlessly👇
The maximum risk is equal to the spread cost, including commissions. A loss of this amount is realized if the position is held to expiration and both puts expire worthlessly👇
For example, both puts will expire worthless if the #stock price at expiration is above the long put’s strike price (higher strike)👇
5.Breakeven stock price at expiration
The strike price of long put (higher strike) minus net premium paid= 2600-16=2584👇
The strike price of long put (higher strike) minus net premium paid= 2600-16=2584👇
6. Payoff Diagram
Below is the payoff diagram for the above Bear Put Spread options strategy:
So, from the above diagram, we can see that both maximum #profit and maximum loss are limited👇
Below is the payoff diagram for the above Bear Put Spread options strategy:
So, from the above diagram, we can see that both maximum #profit and maximum loss are limited👇
We hope you found this thread informative and use it to its maximum potential in the practical world.
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Also, show some love by sharing this with your family and friends and helping us in our mission of spreading financial literacy.
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