Bear put spread

Summary

Use a bear put spread when you think XYZ will fall a little, and soon, but want a cheaper put: buy the $100 put at $3.41 and sell the $95 put at $1.41, paying $200 instead of $341. The most you can make is $300 at $95 or below, and the most you can lose is the $200 at $100 or above. You break even at $98.

Key terms

bear put spread

Buy a higher-strike put and sell a lower-strike put with the same expiry, paying to open, to profit from a fall.

vertical spread

Two options of the same kind and expiry, one bought and one sold, at different strikes.

debit

The net cash you pay to open a trade, $200 for this spread.

strike width

The gap between the two strikes of a spread, times 100 shares, which sets the most the spread can be worth: $500 here.

break-even

The stock price on the last day where you neither make nor lose money: strike plus premium for a call, strike minus premium for a put.

time value

The rest of an option's price, paid for the chance things get better before the end, and gone by the last day.

bid-ask spread

The gap between the bid and the ask, which you pay when you trade in and out.