Long Put Spread (Bear Put Spread)

Overview

Want to bet on a stock going down, but don't want to break the bank doing it? The Bear Put Spread might be just what you're looking for. Think of it as the "economy class" version of buying puts – you give up some of the upside potential in exchange for a more budget-friendly ticket to the bearish party.

Here's how it works: you buy a put option at one strike price and simultaneously sell a put option at a lower strike price (with the same expiration date). The put you buy gives you the right to sell stock at the higher price (that's good if the stock falls), while the put you sell helps offset your cost but caps your profit potential if the stock really tanks.

Key Characteristics

• Market Outlook: "I think this stock is heading down, but I don't need to bet on a complete collapse"
• Risk: Limited to whatever you paid for the spread (which is less than buying a put outright)
• Profit Potential: Limited to the difference between your strike prices minus what you paid
• Breakeven Point: Higher strike price minus what you paid for the spread

When to Use

The Bear Put Spread might be your strategy of choice when:

• You've got a moderately bearish outlook – you expect a decline but not necessarily a crash
• You're looking at a put option but thinking "Yikes, that's expensive!"
• You have a specific price target in mind for how far the stock might fall
• Options are pricey due to high volatility, and you want to reduce your cost
• You want to limit your risk while still maintaining decent profit potential

Real-World Example

Let's walk through this with a concrete example. Say XYZ stock is trading at $50, and you think it's overvalued and likely to fall to around $45 over the next month.

• You buy a $50 strike put option expiring in a month for $3 per share ($300 total)
• To reduce your cost, you sell a $45 strike put option with the same expiration for $1 per share ($100 total)
• Your net cost is $2 per share ($200 total) – that's your maximum possible loss
• Your maximum potential profit is $3 per share ($300 total): the $5 spread width minus your $2 cost

Now let's see what happens in different scenarios:

• Best case: XYZ drops to $45 or below by expiration. You achieve your maximum profit of $300 (a 150% return on your $200 investment).
• Middle case: XYZ falls to $47 at expiration. Your $50 put is worth $3 per share, your $45 put is worthless, and you make $100 profit.
• Worst case: XYZ stays at or rises above $50. Both puts expire worthless, and you lose your entire $200 investment.

Notice that if XYZ crashes to $40 or even $30, your profit is still capped at $300. That's the trade-off for the lower entry cost.

The Good Stuff

• Costs less than buying a put option outright – you're essentially getting a discount
• Your risk is completely defined and limited to what you paid
• Can still deliver impressive percentage returns if your price target is hit
• Less vulnerable to time decay and volatility changes than a lone put option
• Works well when you have a specific price target in mind

The Not-So-Good Stuff

• Your profit is capped – if the stock really crashes, you won't participate in gains beyond your spread width
• Requires a more precise price forecast than simply buying a put
• You'll pay more in commissions for two options instead of one
• Slightly more complex to set up and manage than a single option position
• Bid-ask spreads can eat into your profits, especially on the lower strike put you're selling

Playing It Smart

• Choose your strike prices based on realistic price targets – where do you actually think the stock will go?
• Consider the width of your spread carefully – wider spreads cost more but offer more profit potential
• Aim for a potential return of at least 100% on your investment (e.g., risking $2 to make $3)
• Be cautious around earnings or other major announcements that could cause big price swings
• Don't get greedy – consider taking profits if the stock approaches your lower strike before expiration
• Remember that you don't need to hold until expiration – if you've captured most of the potential profit, it might be wise to close early