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:
- 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.
- 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).
- If NIFTY stays above 18,000 at expiry:
- Both options expire worthless.
- Net loss = ₹5,000 (premium paid).
- If NIFTY falls to 17,700 at expiry: