Basic Options Strategies: Bear Put Spread (Vertical Spread)
Basic Options Strategies: Bear Put Spread
Establishing a bear put spread involves the purchase of a put option on a particular underlying stock, while simultaneously writing a put option on the same underlying stock with the same expiration month, but with a lower strike price.
Both the buy and the sell sides of this spread are opening transactions, and are always the same number of contracts. This spread is sometimes more broadly categorized as a "vertical spread": a family of spreads involving options of the same stock, same expiration month, but different strike prices.
They can be created with either all calls or all puts, and be bullish or bearish. The bear put spread, as any spread, can be executed as a "package" in one single transaction, not as separate buy and sell transactions. For this bearish vertical spread, a bid and offer for the whole package can be requested through your brokerage firm from an exchange where the options are listed and traded.
Moderately Bearish to Bearish
When to Use?
An investor often employs the bear put spread in moderately bearish market environments, and wants to capitalize on a modest decrease in price of the underlying stock. If the investor’s opinion is very bearish on a stock it will generally prove more profitable to make a simple put purchase.
An investor will also turn to this spread when there is discomfort witheither the cost of purchasing and holding the long put alone, or withthe conviction of his bearish market opinion.
To Be Continued In Part Two...
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