Bear Put Spread Options Strategy (TUTORIAL + TRADE EXAMPLES)

the bear put spread option strategy is a bearish strategy that profits when the stock price decreases but has a limited loss potential when the stock price increases the bear put spread is one of the four vertical spread option strategies compared to shorting 100 shares of stock the bear put spread has limited loss potential if the stock price increases while shorting shares of stock has unlimited loss potential since there's no limit to how much a stock's price can increase which means there's no limit to how much the loss potential can be when shorting shares of stock the bear put spread will also typically have a much higher return potential compared to shorting 100 shares of stock because the margin requirement for shorting a hundred shares of stock will usually be far more significant than buying a put spread in this video I'm going to visually explain to you exactly how the bear put spread option strategy works I'm going to show you numerous historical trade examples that use real option data so you can see how bear put spreads have performed in the past based on various stock price scenarios lastly I'll show you how to set up a bear put spread using the tasty works brokerage platform so be sure to stay tuned the bear put spread option strategy is a bearish position net profits when the stock price decreases but also has limited loss potential if the stock price were to increase other names for the bear put spread strategy include the long put spread to put debit spread or simply buying a put spread the bear put spread strategy consists of two separate option transactions occurring at the same time the first transaction is buying a put option and the second transaction is selling a put option but at a lower strike price than the option that was purchased by selling a put option against the put option that was purchased the position will have less profit potential compared to just buying a put all by itself let's take a look at a hypothetical long put spread position look at the expiration profit and loss graph and then we'll move on to some real trade examples to see the strategy in action for this bear put spread example the stock price at the time of entering the position is 135 dollars I'm going to construct the bear put spread from the following options first I'm going to buy the 130 put option for $5 and then I'm going to sell the 120 put option for $2 since I paid $5.00 for the 130 foot and I received $2 for selling the 120 foot the net debit paid in this example is $3 in options trading if you pay more premium than you receive when entering a position you are said to enter the position for a net debit in this example a trader would say that they are purchasing the 130 120 put spread for a net debit of $3 let's take a look at the expiration profit and loss graph for this particular barefoot spread position in this graph we're looking at the profit and loss figures for this particular barefoot spread position based on various stock prices at the time of expiration so where do these profit and loss figures come from the maximum loss potential of a barefoot spread position is the net debit paid times 100 in this example since I paid $3 for the position overall the maximum loss potential is $300 so the net debit of $3 times 100 gives me a maximum loss potential of $300 for every put spread purchased the maximum loss potential of a barefoot spread is realized if the stock price is at or above the long puts a strike price at expiration that's because if the stock price is at or above the long put strike price at expiration both of the put options in the spread will expire worthless and therefore the spreads value at expiration will be zero dollars the maximum profit potential of a barefoot spread position is the width of the strikes less the net debit paid for entering the trade times 100 in this example the spread width is $10 and the net debit paid is $3 which gives me a maximum profit potential of $700 and that comes from the $10.00 strike width less the $3.00 net debit paid which comes out to a $7 maximum gain per spread and if I multiply that by the option contract multiplier of 100 I get a maximum profit potential of $700 per foot spread that was purchased the maximum profit potential will occur if the stock price is at or below the short foot strike price at expiration because at any price below the short foot strike price both options will be and the money and the spread will expire with its maximum value of the strike width if I purchase this spread for $3 and it increases to its maximum value of $10 that would represent a $7 gain per spread and if I multiply that $7 gain by the option contract multiplier of 100 I get a maximum profit potential of $700 per foot spread that was purchased the break-even price of a barefoot spread position is the long foot strike price less the debit paid which in this example since I'm buying the 130 put option or the long foot strike price is 130 dollars and I paid $3 for this spread the break-even price for this particular barefoot spread at expiration is a hundred and twenty seven dollars at 127 dollars the 130 put option will expire with three dollars of intrinsic value and the 120 foot option will expire worthless which means the net value of the 130 120 put spread at expiration will be three dollars if the stock price is exactly at a hundred and twenty seven dollars which means I break even on the trade now that we've looked at a hypothetical barefoot spread trade let's go ahead and look at some historical barefoot spread examples so you can see how the strategy has performed in the past based on real stock price movements in this first example we're gonna look at a scenario where the barefoot spread ends up with the maximum profit potential at the time of expiration here are the trade details at the time of entering this position the stock price was at 104 dollars in 8 cents the options used in this example had 35 days until expiration to construct the barefoot spread position I bought the 115 put option for $15 and 85 cents and I sold the 100 put option for $7.35 the net debit in this example is 8 dollars and 50 cents since I paid 15 dollars and 85 cents for the 115 put and collected seven dollars and 35 cents for selling the 100 foot $15 and 85 cents - $7.35 gives me a net debit of eight dollars and fifty cents the maximum profit potential of this position is six hundred and fifty dollars per foot spread which comes from the $15 strike width less the 8 dollar and fifty cent debit paid times 100 which gives me a maximum profit potential of six hundred and fifty dollars per spread if I buy a spread for eight dollars and fifty cents and its price increases to fifteen dollars I will have a six dollar and fifty cent gain per spread and when I multiply that by the option contract multiplier of 100 I get a profit of six hundred and fifty dollars per spread the maximum loss potential in this example is eight hundred and fifty dollars and that stems from the eight dollar and fifty cent debit paid times 100 if I buy a spread for eight dollars and fifty cents and it expires worthless my loss will be eight hundred and fifty dollars per spread the expiration break-even price for this put spread is 106 dollars and fifty cents let's take a look at how this trade performed on the top of this chart we're looking at the changes in the stock price relative to the put spread strike prices on the bottom of the chart we're looking at the price changes of the put spread itself the barefoot spread in this example was profitable over almost the entire duration of the trade as the stock price was gradually losing value and was below the short put strike price of 100 dollars almost the entire time with the stock price below the short put strike price of 100 dollars the spreads value slowly inched towards its maximum valuation of $15 as all of the extrinsic value came out of the options as time passed you might be wondering why the put spreads value was not $15 the moment the stock price fell below 100 dollars because at that point the put spread was fully in the money so why was the spreads value not the width of the strikes or 15 dollars the reason is that for vertical spreads to achieve their maximum profit potential all of the extrinsic value must come out of the options which means the options must be extremely far in the money or they must have very little time and so expiration or some combination of the two in this example we can see that the spreads value was just under $15 with 11 days until expiration which tells us that the spread was so far in the money and that the options had so little extrinsic you that the spread was already trading for almost its maximum value of $15 even though there was still 11 days until expiration at the time of expiration the put spreads value was $15 which means in this example the maximum profit of 650 dollars was realized this example demonstrates the perfect scenario for a barefoot spread as the stock price continued to decrease immediately after the put spread was purchased and at expiration the stock price was fully below both put spreads strike prices in this example we're gonna look at a barefoot spread that ends up with the maximum loss potential at expiration here are the trade details at the time of entering the trade the stock price was a hundred and twenty seven dollars and 88 cents and the options used in this example had 31 days until expiration to construct the barefoot spread I purchased the 132 put option for four dollars and ninety three cents and sold the 128 put option for two dollars and thirteen cents in this example the net debit is two dollars and 80 cents since I paid four dollars and ninety three cents for the 132 foot and collected two dollars and thirteen cents for selling the 128-foot for 93 - 213 gives me a net debit paid of two dollars and 80 cents the maximum profit potential of this position is a hundred and twenty dollars per spread and that's because the spread width is four dollars and I paid two dollars and 80 cents for the spread that means the most the spread can appreciate in my favor is the difference between its maximum value of four dollars and what I paid for it which is two dollars and 80 cents if I buy a spread for two dollars and 80 cents and its price increases to four dollars that would represent a one dollar and twenty cent gain a purse pred and when I multiply that by the option contract multiplier of 100 the profit per spread it comes out to 120 dollars the maximum loss potential in this case is 280 dollars which comes from the $2 and 80 cent debit paid times the option contract multiplier of 100 which comes out to a maximum loss potential of 280 dollars the expiration breakeven price in this example is 129 20 and that comes from the quit strike price of 132 less the debit paid of $2.80 let's take a look and see what goes wrong with this particular example in this example the trader buys an in the money put spread which means both of the spreads options are in the money at the time of entering the trade this is a high probability trading setup because for this position to make money since both options are already in the money at the time of entering the trade all that has to happen is the stock price has to remain at its current level or decrease and the position will make money over time the downside of buying an in the money spread is that you pay more for the spread since it is a higher probability trade and therefore you have more to lose and less to gain on that particular spread which explains why in this particular example the profit potential is 120 dollars while the loss potential is 280 dollars that tells me that this is a high probability trade meaning the probability of making money is above 50% in theory unfortunately the stock price increased gradually over the entire trade duration which resulted in a lower and lower put spread value over time at expiration the stock price was just below the long put strike price of 132 which means that the 132 put option had just a few pennies of intrinsic value at expiration while the 128 put option expired worthless therefore the value of the 132 128-foot spread in this example was just a few pennies at expiration which means the loss on the position was right near its maximum loss potential of 280 dollars now that we've looked at a few long put spread positions that were profitable and unprofitable what does it look like to actually setup a barefoot spread position using real trading software in this example I'm going to use the tasty works of desktop trading platform and show you exactly how to setup a barefoot spread position be sure to check the link in the description to learn how you can get one of our courses completely free when you open and fund your first tasty works brokerage account using the project option referral code right now I'm on the tasty works trading platform and currently I have up the chart of SP Y which is the SP 500 ETF as we can see here spy recently fell off of a price level of around two hundred and ninety five dollars per share and then plummeted to around two hundred and seventy two dollars per share only to rally all the way back and currently spy is at 292 forty so if I was a trader that was looking to initiate a bear put spread meaning I was going to purchase a put option and then sell a put option at a lower strike price personally I would use this resistance level so to speak to construct my bear put spread because if I was a trader that believed spy was going to test this resistance level and then a trade back lower I can use that to my advantage to construct a bear put spread position and the way I would do that is I would put my long put strike price right around this 295 price level and then I would purchase a put option at a lower strike price to complete the spread so to do that I'm going to click over to the trade page and I do that by clicking on the trade tab right to the left of this chart in between the watchlist and the chart area and when I click on the trade tab it pops open the option chain and currently I'm looking at the August 20 1901 open and close by just clicking directly on the options cycle itself so the August 20 1959 days to expiration and as I said I was going to look at purchasing the 295 put option and selling the 295 put option which would create a $5 wide bear put spread and to do that I click on the ask price of the 295 foot and then click on the bid price of the 290 put if you're not familiar with the bid and ask prices the bid price is the highest price someone is willing to pay for an option so that's what I would want to collect for selling an option is the highest price I can collect for that option and the ask price is the lowest price someone is willing to sell an option for so that means I'm going to click on the ask price now when I click on the ask price of the 295 foot and click on the bid price of the 290 put it queues up in order to potentially trade the 295 to 90 pips spread but this is not an executed order itself this is just queuing it up so that I can show me the price of the spread all of the relevant metrics around this particular spread as we can see here the 295 to 90 pips bread expiring in 59 days is currently trading for about $2 and to make the math easier I'm going to just click the price down to $2 as we know the maximum profit potential of a barefoot spread is the strike width less the premium paid for the spread times 100 and since this is a $5 wide put spread if I paid $2 for a $5 wide spread the most I can make per spread is $3 since if the price increases from $2 to $5 that is a $3 gain per spread and when I multiply by the option contract multiplier up 100 I get a maximum profit potential of $300 per spread and we can see that listed right here on the platform as we know the maximum loss potential is simply the amount paid for the spread times the option contract multiplier of 100 and that gives me a maximum loss potential of $200 so in this particular spread I have a maximum loss potential of $200 in a maximum profit potential of $300 and that's a pretty favorable scenario considering the breakeven price of this spread is right at 290 $3 so I need spy to be below 293 dollars per share and I will make money on this spread now the reason this spread looks very favorable to me is because the maximum profit is $300 the maximum loss potential is $200 which generally means that this is a low probability trade since there's more profit potential than lost potential but in this particular instance the probability of profit is listed right around 49 percent or right around 50% and if I go over to the curve view to visually analyze this trade if I click over to the curve view and make sure analysis is checked we can visually analyze the risk and reward potential for this particular put spread now the reason this spread is particularly attractive to me is because of the breakeven price is at 290 three dollars but spy is already below the break-even price of two hundred ninety three dollars since spy is currently trading for two hundred and ninety two dollars and forty cents so this was just a really quick walkthrough of how you can go about setting up a barefoot spread on the tasty works platform and I've also offered up some insights as to the logic behind this particular spread and in this case I liked this price level of purchasing the 295 foot because if spy hits this resistance level up here and then trades back downwards obviously that's going to be favorable for my spread because this resistance level kind of serves as a defense mechanism against realizing the maximum loss potential of the spread which would occur if spy was above two hundred and ninety five dollars at expiration to wrap up this video I'm going to go through a few frequently asked questions in regards to the barefoot spread option strategy the first frequently asked question is can you close a barefoot spread before it's expiration date or do you have to hold the position through expiration once you've entered it the answer is that you can always close an option position before expiration and you never have to hold an option position through its expiration date even if you've already entered the trait in the case of a barefoot spread since entering the trade consisted of buying a put option and selling a put option at a lower strike price to close the barefoot spread position all you have to do is sell the put option that you purchased and buy back the put option that you sold and when you do that you will close your spread for whatever price it's currently trading for and therefore you will lock in whatever profit or loss you had at that moment the second frequently asked question is can you let the spread expire in the money or should you close the spread on its expiration date and avoid anything that happens after expiration the answer is yes you can hold a barefoot spread through expiration if it is in the money but there are some things you should know the first thing is that if both options are fully in the money you will not end up with any share position if you hold the options through expiration but your brokerage firm will charge you exercise and assignment fees if only the long put is in the money and the short put is out of the money at expiration meaning the stock prices anywhere in between the two strikes at expiration if you hold those put options through expiration you will end up with short shares of stock since you will automatically exercise those long foots that expired in the money for instance if you bought ten put spreads and only the long puts were in the money at expiration and you held those long puts through expiration since you owned ten put contracts that you allowed to expire in the money you would end up with 1000 shares of short stock after letting those ten long put options expire in the money that's a wrap on the bear put spread option strategy I really hope you enjoyed this video and you're more comfortable with how the bear put spread options strategy works be sure to check out the links in the description for additional resources I'm Chris from project option comm and I will see you in the next video [Music] [Music] [Applause] [Music]

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Keywords: bear put spread, put spread, put vertical spread, put debit spread, debit spread, buying a put spread, put option, bearish options strategy, options trading, options strategies, vertical spread options, bear put spread explained, bear put spread example, projectoption, tastyworks, trading, stock market, vertical put spread, put spread example, trade examples

Id: -IIRUXrOhD8

Length: 21min 8sec (1268 seconds)

Published: Wed Jun 26 2019