A bear put spread is a vertical spread that aims to profit from a stock declining in price. It has a bearish directional bias as hinted in the name. Unlike the bear call spread, it suffers from time decay so traders need to be correct on the direction of the underlying and also the timing.
A bear put spread is created through buying an out-of-the-money put and selling a further out-of-the-money put.
The maximum profit is equal to the distance between the strikes, less the premium paid. The loss is limited to the premium paid.
With the market looking a bit volatile here, it could be a good idea to add some bearish trades to your options portfolio.
I’m using the Stock Screener to find highly liquid stocks with a Barchart Sell Rating greater than 80%.
Here are the exact parameters:
And here are the results:
Looking through the charts of these stocks, there were three that stood out to me - Apple (AAPL), Chevron (CVX) and Starbucks (SBUX).
Let’s look at how we might set up a bear put spread on these stocks.
Apple Bear Put Spread Example
Using the July 18 expiry, this trade involves buying the $185 put and selling the $180 put.
The price for the trade is $0.85 which means the trader would pay $85 to enter the trade. This is also the maximum loss. The maximum gain be calculated by taking the width between the strikes and subtracting the premium paid:
5 – 0.85 x 100 = $415.
The breakeven price for the trade is equal to the long put strike, less the premium. In this case, that gives us a breakeven price of $184.15.
The Barchart Technical Opinion rating is a 100% Sell with a Strongest short term outlook on maintaining the current direction.
Of the 37 Analysts following Apple there are 18 Strong Buy, 4 Moderate Buy, 12 Hold, 1 Moderate Sell and 2 Strong Sell recommendations.
CVX Bear Put Spread Example
For CVX, I would also use the July 18 expiry and buy the $125 strike put and sell the $120 strike put.
The cost of the trade is $75, which is also the maximum loss with the maximum possible gain being $425. The maximum gain would occur if Chevron stock fell below $120 on the expiration date.
The Barchart Technical Opinion rating is an 88% Sell with a Strengthening short term outlook on maintaining the current direction.
Of the 23 Analysts following Chevron there are 12 Strong Buy, 2 Moderate Buy, 6 Hold and 2 Strong Sell ratings.
Let’s look at another example, this time on Starbucks.
SBUX Bear Put Spread Example
On Starbucks, I would use the July 18 expiry and buy the $75 strike put and sell the $70 strike put.
The cost of the trade is $70 which is also the maximum loss with the maximum possible gain being $430. The maximum gain would occur if Starbucks stock fell below $70 on the expiration date.
The Barchart Technical Opinion rating is an 88% Sell with a Strongest short term outlook on maintaining the current direction.
Of the 22 Analysts following Starbucks there are 12 Strong Buy, 2 Moderate Buy, 6 Hold and 2 Strong Sell ratings.
Mitigating Risk
Thankfully, bear put spreads are risk defined trades, so they have some build in risk management. The most the Apple example can lose is $85 while the Chevron example can lose $75 and the Starbucks trade has risk of $70.
For each trade consider setting a stop loss of 50% of the max loss.
Please remember that options are risky, and investors can lose 100% of their investment. This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
