An option strategy wherein the investor establishes a put spread by buying put option of a higher strike price and simultaneously selling a put option of a lower strike price, of the same underlying and same expiry.
The name ‘Bear’ spread itself signifies that the investor is bearish on the price of the underlying security.
When to use this strategy?
This strategy is used when the investor is moderately bearish on the underlying security.
How to build this strategy?
This strategy has two legs:
Leg 1 – Buy 1 ITM Put
Leg 2 – Sell 1 OTM Put
Credit Spread/Debit Spread
This is a Debit Spread strategy.
This strategy has limited profit potential.
When is this strategy profitable?
The investor stands to make maximum profit when the underlying security’s price is lesser than or equal to the strike price of the put option sold.
The investor faces limited risk in this strategy to the tune of the net premium paid.
When is this strategy unprofitable?
The investor faces the maximum loss when the underlying security’s price is greater than or equal to the strike price of the put option purchased.