Bear Put Spread

What it is and when to use it

The bear put spread is the default bearish debit structure. You buy the put at the level from which you want to profit and sell another lower down, where you think the fall will stall. That sale finances part of the purchase and puts a floor under the profit, just as the short call put a ceiling on the bullish version.

You use it when you expect a moderate, bounded decline, not a crash. If you think SPY corrects to 560 and finds support there, the 580/560 spread says exactly that. If what you fear is a collapse, selling the 560 put leaves you out of the part of the move where real protection would have mattered.

There is a detail that does not appear in the bullish version: the asymmetry of the volatility skew. Out-of-the-money puts trade at higher implied volatility than equivalent calls because hedging demand is structural, so a bearish spread usually costs a little more than its bullish mirror at the same distance. Here it is $706 against $775, but with the 20-point width measured downward the effect is smaller than in underlyings with steeper skew.

How it is built

• Buy 1 put at the strike from which you want to start profiting, usually at the money or slightly in.
• Sell 1 put at a lower strike, where you expect the fall to stop.
• The net debit is premium paid minus premium collected, and it is your maximum loss.
• Width minus debit is the maximum profit.

Unlike a covered call, neither leg obliges you to anything while the position is open: the risk is paid up front and no margin call is possible, whatever the move.

A full worked example

SPY at 580.00 with 45 days to expiry, same model conditions as the other pages.

Net debit = 7.06 × 100 = $706, which is the maximum loss.

The 580 put bought alone would cost $1,111. Selling the 560 returns $405, 36% of the cost, in exchange for giving up everything that happens below 560.

Maximum profit, maximum loss and break-evens

The long-run break-even sits at being right 35.3% of the time. As with every debit structure, the required hit rate is low and the frequency of losses is high: most of these trades end up worth zero.

• Maximum profit = (width − debit) × 100 = (20 − 7.06) × 100 = $1,294, with price at 560 or below at expiry.
• Maximum loss = debit = $706, with price at 580 or above.
• Break-even = long strike − debit = 580 − 7.06 = 572.94, 1.22% below the current price.
• Risk/reward = $706 against $1,294, i.e. 1 to 1.83.

To collect the maximum, SPY has to fall 3.4% and stay there. A 3.4% fall over six weeks is perfectly normal; what is less normal is it sitting still just below 560 on expiry day.

The position Greeks

Positive vega is the hidden advantage of a bearish spread over a bullish one. When the market falls, implied volatility rises, and those $19.97 per point add up at the very moment delta is also adding up.

Management: when to close, when to roll

Close at 50-75% of the maximum

As in the bullish spread, the final stretch of profit requires price to sit still below the short strike and exposes weeks of being right to a bounce.

If the fall arrives fast

A slump in the first week leaves the spread near its maximum with plenty of time left. Closing there is almost always better than waiting: what is left to gain is small and what a bounce can give back is large.

As a portfolio hedge

If the spread is hedging shares, rolling it down after a fall turns unrealised profit into fresh protection closer to price. It is the orderly way to keep the hedge alive without paying for it twice.

Expiring between strikes

With price between 560 and 580 at expiry, the long put is in the money and the short one is not: you end up short shares if it is exercised and you do not close first. Closing the spread the day before avoids the surprise.

Common mistakes

Using it as portfolio insurance

A bear put spread only protects between 580 and 560. Below 560 the hedge stops working exactly when it is most needed. Real protection requires a lone put or a collar, which cost more because they cover more.

Buying it after the fall

When the market has already dropped, implied volatility is high and puts are expensive. Buying premium then is paying the price of fear, and a return to calm subtracts through vega even if price keeps drifting lower.

Selling the lower strike too close

A 580/575 spread barely cheapens the put and caps the profit at 5 points. The width has to match the fall you actually expect.

Confusing it with a bull put spread

Both are "put spreads" and they are opposites. The bear put spread is a debit and bearish; the bull put spread sells the high put and buys the low one, collects a credit and is bullish. The name is similar and the sign of the result is not.