Bear Put Spreads

Bear put spreads are another way you could be bearish in the market and not need the stock to necessarily go down for you to make money.  The stock can go down sideways or even up a little as long as it stays below a certain strike price.

It involves Selling an in the money put on a stock and getting called out.  For example say you find a stock, well call it XYZ stock that is trading at $60.  You are bearish on this stock but do not want to short the stock or buy a put on it.

Instead you buy the $70 put for $12 and sell the $65 put for $8.  So when you initially enter the spread you will be negative $4.  So, why would you trade this?

Well if the stock stays below $65 this trade could potentially be profitable.  If the stock closes at say $59 by expiration whoever bought the $65 put option will have the right to sell this $59 at $65.  Of course they are going to exercise that right.

That would force you to buy this stock at $65, which would normally be bad.  But because you bought a $70 put you have the right to sell this stock at $70.

So let’s review, you would be forced to buy the stock at $65, but you would have the right to sell it at $70.  From this you make $5, and it cost you $4 to do this trade.  That means your total profit is $1.  Of course the stock needs to stay below $65 for this to happen.

The other nice thing about bear put spreads is if you change your stance on the trade you can easily adjust.  If you change your mind for some reason and just want to profit from a sharp decline you can easily buy back the put you sold and you would be left with a regular put option.  However in most cases it is probably better to stick to the original plan.

For more information about bear put spreads visit http://www.stocks-simplified.com/Bear_Put_Spread_Stocks.html