Bear Put Spread

A bear put spread (also called a debit put spread or long put spread) is an options strategy used when you expect a moderate decline in an underlying asset. It reduces the cost and risk of buying a single put by simultaneously selling a lower-strike put with the same expiration.

How it works

• Buy one put option with a higher strike price.
• Sell one put option on the same underlying with a lower strike price and the same expiration.
• The trade is a net debit (you pay to open it).

Key outcomes (per contract = 100 shares)
– Maximum profit = (higher strike − lower strike) − net premium paid.
– Maximum loss = net premium paid.
– Break-even price at expiration = higher strike − net premium paid.

Setup and payoff example

Example 1 (simple numbers)
– Underlying current price: $30.
– Buy 35-strike put for $4.75 ($475).
– Sell 30-strike put for $1.75 ($175).
– Net premium paid = $4.75 − $1.75 = $3.00 ($300 per contract).
– Max profit = (35 − 30) − $3 = $2.00 ($200 per contract).
– Max loss = $3.00 ($300).
– Break-even = 35 − $3 = $32.

Example 2 (Levi Strauss)
– Underlying: $50.
– Buy 40-strike put for $4.00.
– Sell 30-strike put for $1.00.
– Net premium = $3.00.
– Break-even = 40 − 3 = $37.
– Max profit = (40 − 30) − 3 = $7.00 per share ($700 per contract).
– Max loss = $3.00 per share ($300 per contract).

Pros

• Lower upfront cost than buying a single put (premium offset by sold put).
• Defined, limited risk (max loss = premium paid).
• Better risk profile than short-selling (no unlimited upside risk).

Cons

• Profit is capped at the strike differential minus the net premium.
• If the underlying falls significantly beyond the lower strike, you forgo additional profits.
• Potential for early assignment on the short put (especially with American-style options around dividends or corporate events).
• Commissions, slippage, and margin rules can affect net returns.

Risks and practical considerations

• Early assignment: Selling the lower-strike put exposes you to the chance of being assigned early, which can force a stock position or change risk exposure.
• Expiration behavior: The position’s value at expiration depends on where the underlying closes relative to the two strikes:
• At or below the lower strike: full max profit.
• Between strikes: partial profit.
• At or above the higher strike: full loss of the premium paid.
• Transaction costs and bid-ask spreads can materially affect small net premiums.
• Use position sizing consistent with the defined maximum loss.

When to use a bear put spread

• You expect a modest to moderate decline in the underlying before option expiration.
• You want downside exposure with limited, known risk and lower upfront cost than a standalone put.
• You are willing to cap upside in exchange for reduced cost and risk.

Bottom line

A bear put spread is a conservative bearish options strategy that limits both potential gains and losses. It is suitable when you forecast a decline but want to control cost and downside exposure. Calculate net premium, break-even, max profit, and max loss before entering the trade, and be mindful of assignment risk and transaction costs.