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Similar to the Bull Call Spread (as we saw it in the previous video), the Bear Put Spread is quite easy to implement.
One can implement a bear put spread when the market outlook is moderately bearish, i.e. when they expect the market to go down in the short term while at the same time you don’t expect it to go down much.
A spread strategy as we know limits both profits and losses as it involves buying and selling of options of same category but different strike prices.
A risk averse trader would implement Bear Put Spread strategy by simultaneously –
1. Buying an In the money Put option
2. Selling an Out of the Money Put option
It’s not necessary that the Bear Put Spread has to be created with an ITM and OTM option. The Bear Put spread can be created by employing any two put options.
The choice of strike depends on the aggressiveness of the trade. However do note that both the options should belong to the same expiry and same underlying.
A bear put spread is established for a net debit (or net amount of premium paid) and this strategy will profit when the underlying volatility of the stock increases and the stock price also decreases.
Let’s understand this better with the help of a practical example.
Sell a Put of Strike Price 10350, receiving a premium of 95 and buying a put of strike 10450 by paying a premium of 147. Nifty spot price is currently trading at 10360.
Here maximum loss = net premium outflow which is = 52, maximum profit = spread- maximum loss = 48 and break event point = higher strike price – max loss = 10398.
As can be seen from the example above the loss and profit is both limited. Maximum loss from this strategy is 52 and maximum profit is 48.
The trader would start incurring losses if the price of the underlying asset increases i.e. inverse to what he has been speculating.
To conclude, we can say that the bear put spread is a great alternative to simply buy a put outright.
Keeping in mind when the trader is neutral to bearish on the price action in the underlying stock
Thank you for watching the video.
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