A bear put spread is a type of vertical spread. It consists of buying one put in hopes of profiting from a decline in the underlying stock and writing another put with the same expiration, but with a lower strike price, as a way to offset some of the cost. Because of the way the strike prices are selected, this strategy requires a net cash outlay (net debit) at the outset.
Assuming the stock moves down toward the lower strike price, the bear put spread works a lot as its long put component would as a standalone strategy. However, in contrast to a plain long put, the possibility of greater profits stops there. This is part of the tradeoff; the short put premium mitigates the cost of the strategy but also sets a ceiling on the profits.
A different pair of strike price choices might work, provided that the short put strike is below the long put strike. The choice is a matter of balancing tradeoffs and keeping to a realistic forecast.
The lower the short put strike, the higher the potential maximum profit; but that benefit has to be weighed against the disadvantage: a smaller amount of premium received.
It is interesting to compare this strategy to the bear call spread. The profit/loss payoff profiles are exactly the same, once adjusted for the net cost to carry. The chief difference is the timing of the cash flows. The bear put spread requires a known initial outlay for an unknown eventual return; the bear call spread produces a known initial cash inflow in exchange for a possible outlay later on.
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