Bear Spread

A bear spread is a strategy where you simultaneously sell a put at Strike Price 1, and buy a put at Strike Price 2. Recall that users will pocket the premium should the option not be exercised. By selling a put with a lower strike price, users can reduce their total transaction costs and create a strategy that can generate a fixed income like in a bull spread.

What are its components?

A bear spread has two components:

  • Short a put at strike price 1
  • Buy a put at strike price 2
  • (*A bear spread can also be created with puts)

When and why should I have a bear spread?

You should have a bear spread if you are moderately bearish on a stock and wish to enter a bearish position with protection. By having a long put, you will have a bearish position on a stock and a protection should the stock increase. This position entails that you will pay a premium, where the short option comes in play and reduces your costs. By doing this additional transaction, you are willing to reduce your gains for a lower transaction costs and a steady income stream once the stock performs at a price below strike price 1.

What is the payoff and profit graph?

What is the break-even point?

The break-even point of a bear spread can be defined by finding the stock price where the bear spread generates a zero-dollar profit. By adding both puts together and equating it to zero, you should solve for ST.

About Kevin Smith

Kevin is the content manager for Personal Finance Lab and is from Chicago, Illinois. He has a Master's Degree in Economics from Concordia University in Montreal, Canada. In addition to an economics background, he has also built training manuals to prepare finance companies for licensing requirements in mortgage loan origination and insurance sales.