1/ Another #TradingThursday is coming right up…
We are discussing Debit Spreads again, particularly Bear Put Spreads. 🐻🛑📉
We are discussing Debit Spreads again, particularly Bear Put Spreads. 🐻🛑📉
2/ A Bear Put Spread is a particular options strategy composed of a long put and a short put. As the name implies, it is a directional strategy that pays when the asset goes down.
3/ Specifically, a bear put spread is the following ✌️ two-part strategy:
- Buy a put with a higher strike (typically near the money or slightly out of the money)
- Sell a put with the lower strike and at the same expiry
- Buy a put with a higher strike (typically near the money or slightly out of the money)
- Sell a put with the lower strike and at the same expiry
4/ Long Put vs. Bear Put Spread: Reducing 💵 capital at risk
A bear put spread reduces the net risk of the trade compared to a long put strategy. The price of purchasing a put option with a higher strike price is compensated by selling a put option with a lower strike price.
A bear put spread reduces the net risk of the trade compared to a long put strategy. The price of purchasing a put option with a higher strike price is compensated by selling a put option with a lower strike price.
5 / The capital at risk for either a long put or a bear put spread is the amount paid upfront 🫴 for the option or option bundle, respectively. When compared to buying a long put alone, the net capital spending is smaller for the bear put spread.
6 / Long Put vs. Bear Put Spread: Decreasing upside potential
A long put has a max profit of its strike price (if the underlying price hits 0), but the bear put spread’s max profit is the difference between the long put and short put strike.
A long put has a max profit of its strike price (if the underlying price hits 0), but the bear put spread’s max profit is the difference between the long put and short put strike.
7/ As with any debit or credit spread, an investor can change the PnL bounds by selecting certain strike prices. Each selection reflects the classic risk/reward tradeoff; the greater the opportunities, the greater the risk, as opposed to fewer opportunities and less risk.
8 / Example
Suppose the current price of Bitcoin is $16,000. We want to buy one put with a strike price of $16,000 and an expiration date of Feb 24, 2023.
Cost of premium to buy: -$1166
We also sell one put with a strike price of $15,000.
Premium earned: $818
Suppose the current price of Bitcoin is $16,000. We want to buy one put with a strike price of $16,000 and an expiration date of Feb 24, 2023.
Cost of premium to buy: -$1166
We also sell one put with a strike price of $15,000.
Premium earned: $818
9 / Selling the put option with the lower strike price helps offset the cost of buying the put option and increases the net premium. It comes at the cost that the most you can make is the difference between the strike prices.
10/ Net Premium
-$1166 + $818 = -$348
This is the net premium they would pay upfront to put on this particular sample option strategy.
-$1166 + $818 = -$348
This is the net premium they would pay upfront to put on this particular sample option strategy.
11 / PnL Graph 
12 /The maximum potential loss is equal to the net premium.
Maximum Potential Loss = -$348
Maximum Potential Loss = -$348
13 / As we previously stated, the maximum potential profit is equal to the difference between the strike prices.
Maximum Potential Profit = $1,000
Maximum Potential Profit = $1,000
14 /The breakeven point occurs at the expiration price, where the payoff of the strategy equals the premium. In our case, this simplifies down to |
Breakeven expiration price = strike price of long put - net premium = $15,652
Breakeven expiration price = strike price of long put - net premium = $15,652
15 /Summary
The bear put spread is a strategy that pays off when the underlying asset declines. It is a natural alternative to buying a put that reduces the amount of capital at risk by trading off the amount of upside potential compared to a long put.
The bear put spread is a strategy that pays off when the underlying asset declines. It is a natural alternative to buying a put that reduces the amount of capital at risk by trading off the amount of upside potential compared to a long put.
16/ Make a bear put spread on Arrow’s Testnet!
Go over to our testnet and construct a bear put spread by navigating to our advanced UI 🖥️ and choosing to buy a higher strike put option and sell a lower strike as in the screencaps below!
Go over to our testnet and construct a bear put spread by navigating to our advanced UI 🖥️ and choosing to buy a higher strike put option and sell a lower strike as in the screencaps below!
🚨Disclaimer: This is purely for educational purposes. This is not investment advice!🚨
🚧CORRECTION TO 13*: 🚧
For the bear put spread example:
Max payoff = difference between strikes = 1000
Max profit = 1000 - premium = 1000 - 348 = 652
For the bear put spread example:
Max payoff = difference between strikes = 1000
Max profit = 1000 - premium = 1000 - 348 = 652
🚧CORRECTION TO 6*: 🚧
A long put has a max PAYOFF of its strike price (if the underlying price hits 0), but the bear put spread’s max PAYOFF is the difference between the long put and short put strike.
profits subtract the premiums paid to obtain the option(s) from the payoffs
A long put has a max PAYOFF of its strike price (if the underlying price hits 0), but the bear put spread’s max PAYOFF is the difference between the long put and short put strike.
profits subtract the premiums paid to obtain the option(s) from the payoffs
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