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.
Let’s take a look at Barchart’s Bear Put Spread Screener for today:
Some interesting trades here with impressive Max Profit Percentage.
Let’s strengthen our bearish screener by adding a parameter for any stock with a Sell rating greater than 40%. Here are the results:
Let’s take a look at the first item in the table – a bear put spread on Starbucks (SBUX).
Starbucks Bear Put Spread Example
Using the January 16 expiry, this trade involves buying the $90 put and selling the $85 put.
The price for the trade is $2.80 which means the trader would pay $280 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 – 2.80 x 100 = $220.
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 $87.20.
The Barchart Technical Opinion rating is a 72% Sell with a Strongest short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Of the 33 Analysts following Starbucks there are 16 Strong Buy, 2 Moderate Buy, 10 Hold, 2 Moderate Sell and 3 Strong Sell recommendations.
NVO Bear Put Spread Example
The NVO example is using the November 21 expiry and involves buying the $60 strike put and selling the $55 strike put.
The cost of the trade is $295, which is also the maximum loss with the maximum possible gain being $205. The maximum gain would occur if Novo Nordisk (NVO) stock fell below $55 on the expiration date.
The Barchart Technical Opinion rating is an 88% Sell with a Strengthening short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Of the 20 Analysts following NVO there are 6 Strong Buy, 11 Hold, 1 Moderate Sell and 2 Strong Sell ratings.
Let’s look at another example, this time on Chipotle Mexican Grill (CMG).
CMG Bear Put Spread Example
The CMG example is using the November 21 expiry and involves buying the $45 strike put and selling the $40 strike put.
The cost of the trade is $241 which is also the maximum loss with the maximum possible gain being $259. The maximum gain would occur if Chipotle stock fell below $40 on the expiration date.
The Barchart Technical Opinion rating is a 100% Sell with a Strongest short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Of the 32 Analysts following CMG there are 21 Strong Buy, 3 Moderate Buy and 8 Hold ratings.
Mitigating Risk
Thankfully, bear put spreads are risk defined trades, so they have some build in risk management. The most the SBUX example can lose is $280 while the NVO example can lose $295 and the CMG trade has risk of $241.
For each trade consider setting a stop loss of 30% 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.
