Bear Spread

A bear spread is an options strategy used when an investor expects a moderate decline in the price of an underlying asset. It combines the simultaneous purchase and sale of two options on the same underlying with the same expiration but different strike prices. Bear spreads are vertical spreads that limit both potential profit and potential loss.

How it works

• Uses either puts (bear put spread) or calls (bear call spread).
• Both options share the same expiration date; strikes differ.
• Outcome benefits when the underlying declines moderately; losses are capped if the underlying rises.
• Can be structured in ratios (e.g., buy one put, sell two lower-strike puts), but the basic forms below are one-for-one vertical spreads.

Bear Put Spread

Structure:
– Buy a put at a higher strike (pay premium).
– Sell a put at a lower strike (receive premium).
– Net result: debit (cost).

Payoffs and formulas:
– Net debit = premium paid − premium received
– Break-even = higher strike − net debit
– Maximum profit = (higher strike − lower strike) − net debit
– Maximum loss = net debit

Example:
– Underlying at $50. Buy $48 put, sell $44 put. Net debit = $1.
– Break-even = $48 − $1 = $47.
– Max profit = ($48 − $44) − $1 = $3.
– Max loss = $1 (the initial cost).

Best case: underlying ≤ lower strike at expiration (max profit). Worst case: underlying ≥ higher strike (both options expire worthless, loss = net debit).

Bear Call Spread

Structure:
– Sell a call at a lower strike (receive premium).
– Buy a call at a higher strike (pay premium).
– Net result: credit (income).

Payoffs and formulas:
– Net credit = premium received − premium paid
– Break-even = lower strike + net credit
– Maximum profit = net credit
– Maximum loss = (higher strike − lower strike) − net credit

Example:
– Underlying at $50. Sell $44 call, buy $48 call. Net credit = $3.
– Break-even = $44 + $3 = $47.
– Max profit = $3 (the credit received).
– Max loss = ($48 − $44) − $3 = $1.

Best case: underlying ≤ lower strike (both calls expire worthless, keep credit). Worst case: underlying ≥ higher strike (loss equals strike spread minus credit).

When to use

• Expect a moderate decline in the underlying, not a large drop.
• Prefer defined risk and defined reward over unlimited risk strategies.
• Use to hedge existing long positions or to express a bearish-but-limited outlook.

Advantages and disadvantages

Pros:
– Limits potential losses.
– Lower net cost than buying a single option (bear put) or generates income (bear call).
– Defined risk profile makes position management simpler.

Cons:
– Caps upside potential (limited maximum profit).
– Requires margin for short-option components.
– May still incur loss if the underlying rises significantly (though loss is capped).

Key takeaways

• Bear spreads are bearish vertical strategies using either puts or calls with the same expiration and different strikes.
• Bear put spreads are net debit strategies that profit if the underlying falls below the lower strike.
• Bear call spreads are net credit strategies that profit if the underlying stays below the lower strike.
• Both limit maximum profit and maximum loss; choose the form based on whether you prefer to pay a debit (put spread) or receive credit (call spread).