Bear Put Spread – Moderately Bearish Option Strategy

What is a Bear Put Spread?

A Bear Put Spread is a moderately bearish options strategy where a trader buys a higher strike put option and simultaneously sells a lower strike put option of the same expiry. This spread reduces the cost of taking a bearish position compared to a naked long put while keeping risk defined and profits capped.

The main attraction of the Bear Put Spread lies in its ability to profit from a controlled downside move without the high cost of buying puts outright. Instead of paying full premium, the trader recovers part of the cost by selling a lower strike put. The trade-off: profit potential is limited.

• Risk is limited: Maximum loss is the net premium paid.
• Profit is capped: Maximum profit occurs when the stock/index closes at or below the lower strike.
• Lower cost: Selling the lower strike put reduces entry cost compared to a naked long put.

When to Use a Bear Put Spread

This strategy works best when you expect the stock or index to decline steadily but not collapse sharply. It’s for moderate bearishness, not panic-driven crashes. The spread is efficient in capturing profits from gradual declines while keeping risk defined.

• You expect a moderate downward move in the near term.
• You want a cheaper alternative to naked put buying.
• You prefer limited risk with capped reward.
• Market volatility is expected to stay stable or rise slightly.

Setup Checklist

Before placing a bear put spread, check the following:

• Underlying: Pick liquid stocks or indexes with active options.
• Strikes: Buy ATM/ITM put, sell OTM put (same expiry).
• Expiry: 2–6 weeks gives enough time for decline to play out.
• Risk budget: Net premium paid = maximum loss.

Entry Rules

1. Buy 1 ATM/ITM put option.
2. Sell 1 OTM put option (same expiry).
3. Note net premium paid — your defined risk.
4. Record breakeven and profit range in your journal.

Risk & Management

Understanding how profits/losses unfold is critical:

• Downside risk: Limited to premium paid.
• Upside potential: Limited to spread width minus net premium.
• Time decay: Works against the bought put but partly offset by the sold put.
• Volatility: Higher volatility usually helps the spread value.
• Adjustment: If market stabilizes, consider cutting early to save premium.

Exit Rules

• If stock/index falls near lower strike: Book profit early; don’t wait for expiry.
• If stock/index stays flat: Option premium erodes — reassess outlook.
• If stock/index rises: Accept defined loss (premium) and exit.

Position Sizing & Money Management

• Risk only 1–2% of total capital per trade.
• Don’t overleverage just because risk looks small.
• Use spreads to limit losses — never chase unlimited downside gains.

Example: NIFTY Bear Put Spread

Assume NIFTY is at ₹25,000:

• Buy 25,000 PE @ ₹260
• Sell 24,500 PE @ ₹120

Net Premium Paid: ₹140 (₹3,500 total)

Max Profit: ₹9,000

Max Loss: ₹3,500

Breakeven: ₹24,860

Key Metrics to Track

• Breakeven point: Higher strike – net premium.
• Max profit: (Spread width – net premium) × lot size.
• Max loss: Net premium paid.
• Theta: Time decay effect, partially hedged.
• Delta: Net bearish exposure.

Advantages of a Bear Put Spread

• Cheaper than a naked put position.
• Limited, known risk upfront.
• Profits efficiently from moderate declines.
• Lower theta decay impact than a plain long put.

Disadvantages of a Bear Put Spread

• Profit is capped at the lower strike.
• No benefit from a crash beyond the lower strike.
• Requires correct strike/expiry selection for success.

Comparison: Bear Put Spread vs Long Put

The Bear Put Spread is an intermediate-level options strategy that allows traders to capture profits from moderate declines while strictly capping risk. It’s a smart way to short markets without the heavy cost of naked puts or risky futures.