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Bear Put Spread Strategy

Strategy Type:

Bear Put Spread is a moderately bearish strategy. It is used when an investor expects the underlying asset's price to decrease but not significantly.

Components: The strategy involves two main components:

  • Long Put Options: The investor buys a put option with a specific strike price. This option gives the investor the right to sell the underlying asset at the strike price if the option is exercised by the option buyer.
  • Short Put Option: Simultaneously, the investor sells (writes) a put option with a higher strike price. This option creates an obligation for the investor to buy the underlying asset at the strike price if the option is exercised.

Profit and Loss Potential:

  • Maximum Profit: The maximum profit is limited to the difference between the strike prices of the two put options minus the net premium paid for the spread.
  • Maximum Loss: The maximum loss is limited to the net premium paid for the spread.
Break-Even Point: The break-even point is the strike price of the long put minus the net premium paid for the spread.

Strategy Goals:

  • The primary goal of a Bear Put Spread is to profit from a moderate price decrease in the underlying asset.
  • The strategy is designed to limit risk compared to simply buying a put option by providing some premium income from selling the higher strike put.

Risk Management:

  • The risk is limited to the net premium paid for the spread.
  • The strategy is suitable for investors who expect moderate bearishness and want to control risk.