Bear Put Spread

A Bear Put Spread involves buying a put option at a higher strike price and selling a put option at a lower strike price. It profits from a moderate price decline and helps reduce the cost of buying a put option by selling another put.

Significance:

• Ideal for moderately bearish conditions, where a limited price decline is expected.
• Buying an ATM put and selling an OTM put reduces the cost while capping profit and risk.
• Risk is capped at the net premium paid, and profit is capped at the difference between the strike prices minus the premium paid.

Example:

• NIFTY trading at 18,000.
• Buy 18,000 Put at ₹200 and sell 17,700 Put at ₹100 (lot size = 50).
• Outcome:
  1. If NIFTY falls to 17,700 at expiry:
     • Gain on bought put = ₹300 × 50 = ₹15,000.
     • Loss on sold put = ₹0 (since it expires at the strike price).
     • Net profit = ₹15,000 − ₹5,000 (net premium) = ₹10,000.
  2. If NIFTY falls to 17,500 at expiry:
     • Gain on bought put = ₹500 × 50 = ₹25,000.
     • Loss on sold put = ₹200 × 50 = ₹10,000.
     • Net profit = ₹25,000 − ₹10,000 − ₹5,000 = ₹10,000 (capped).
  3. If NIFTY stays above 18,000 at expiry:
     • Both options expire worthless.
     • Net loss = ₹5,000 (premium paid).