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Bear Put Spread

	
	Establishing a bear put spread involves the purchase of a
	put option on a particular underlying stock, while 
	simultaneously writing a put option on the same underlying
	stock with the same expiration month, but with a lower
	strike price. Both the buy and the sell sides of this
	spread are opening transactions, and are always the 
	same number of contracts. This spread is sometimes more
	broadly categorized as a "vertical spread": a family
	of spreads involving options of the same stock, same
	expiration month, but different strike prices. They can
	be created with either all calls or all puts, and be 
	bullish or bearish. The bear put spread, as any spread,
	can be executed as a "package" in one single transaction,
	not as separate buy and sell transactions. For this bearish
	vertical spread, a bid and offer for the whole package 
	can be requested through your brokerage firm from an 
	exchange where the options are listed and traded. 

P/L Profile

    
    
Market Opinion?
	Moderately Bearish to Bearish

When to Use?
	Moderately Bearish 
	An investor often employs the bear put spread in moderately 
	bearish market environments, and wants to capitalize on a 
	modest decrease in price of the underlying stock. If the 
	investor's opinion is very bearish on a stock it will generally
	prove more profitable to make a simple put purchase. 

Risk Reduction 
	An investor will also turn to this spread when there is 
	discomfort with either the cost of purchasing and holding 
	the long put alone, or with the conviction of his bearish 
	market opinion. 



Benefit
	The bear put spread can be considered a doubly hedged strategy.
	The price paid for the put with the higher strike price is 
	partially offset by the premium received from writing the put 
	with a lower strike price. Thus, the investor's investment in 
	the long put and the risk of losing the entire premium paid 
	for it, is reduced or hedged. 

	On the other hand, the long put with the higher strike price caps
	or hedges the financial risk of the written put with the lower 
	strike price. If the investor is assigned an exercise notice on
	the written put, and must purchase an equivalent number of 
	underlying shares at its strike price, he can sell the purchased
	put with the higher strike price in the marketplace. The premium
	received from the put's sale can partially offset the cost of 
	purchasing the shares from the assignment. The net cost to the 
	investor will generally be a price less than current market prices. 
	As a trade-off for the hedge it offers, this written put limits the
	potential maximum profit for the strategy. 

Risk vs. Reward 
	Downside Maximum Profit: Limited 
	Difference Between Strike Prices - Net Debit Paid 

Maximum Loss: Limited 
	Net Debit Paid 

	A bear put spread tends to be profitable if the underlying stock
	decreases in price. It can be established in one transaction, but
	always at a debit (net cash outflow). The put with the higher strike
	price will always be purchased at a price greater than the 
	offsetting premium received from writing the put with the lower 
	strike price. 

	Maximum loss for this spread will generally occur as underlying 
	stock price rises above the higher strike price. If both options 
	expire out-of-the-money with no value, the entire net debit paid
	for the spread will be lost. 

	The maximum profit for this spread will generally occur as the 
	underlying stock price declines below the lower strike price, and
	both options expire in-the-money. This will be the case no matter 
	how low the underlying stock has declined in price. If the underlying
	stock is in between the strike prices when the puts expire, the
	purchased put will be in-the-money, and be worth its intrinsic value.
	The written put will be out-of-the-money, and have no value. 

Break-Even-Point (BEP)?
	BEP: Strike Price of Purchased Put - Net Debit Paid

Volatility
	If Volatility Increases: Effect Varies 
	If Volatility Decreases: Effect Varies 

	The effect of an increase or decrease in either the volatility of 
	the underlying stock may be noticed in the time value portion of 
	the options' premiums. The net effect on the strategy will depend 
	on whether the long and/or short options are in-the-money or 
	out-of-the-money, and the time remaining until expiration. 

Time Decay?
	Passage of Time: Effect Varies 

	The effect of time decay on this strategy varies with the 
	underlying stock's price level in relation to the strike 
	prices of the long and short options. If the stock price
	is midway between the strike prices, the effect can be 
	minimal. If the stock price is closer to the higher 
	strike price of the purchased put, losses generally increase
	at a faster rate as time passes. Alternatively, if the 
	underlying stock price is closer to the lower strike price
	of the written put, profits generally increase at a faster
	rate as time passes. 

Alternatives before expiration?
	A bear put spread purchased as a unit for a net debit in 
	one transaction can be sold as a unit in one transaction 
	in the options marketplace for a credit, if it has value. 
	This is generally the manner in which investors close out 
	a spread before its options expire, in order to cut a loss 
	or realize profit. 

Alternatives at expiration?
	If both options have value, investors will generally close 
	out a spread in the marketplace as the options expire. 
	This will be less expensive than incurring the commissions
	and transaction costs from a transfer of stock resulting 
	from either an exercise of and/or an assignment on the puts. 

	If only the purchased put is in-the-money and has value as 
	it expires, the investor can sell it in the market place 
	before the close of the market on the option's last trading
	day. On the other hand, the investor can exercise the put
	and either sell an equivalent number of shares that he owns
	or establish a short stock position

	



 
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