What is Bear Put Spread Option Strategy ?

As the name suggests Bear Put spread is a Bearish strategy is a multi-leg option strategy is very popular in options trading. which requires both Buying and Selling of a put option of different strike price of the same expiry of the same stock or index, in Bear Put Spread You buy a higher strike put and You sell a lower strike put.

The Risk and Rewards of Bear Put spread Option Strategy are Fixed Loss and Fixed Profits. This strategy is executed when you have Bearish view on the stock or index and think that the price will come down. this article you will learn about risk and reward profiles. Money Management, when to implement the strategy, how to trail and book full profits, Money Management and Position Sizing and everything else.

How to execute Bear Put Spread Option Trading Strategy ?

1. Sell a Put Option:

• The strategy begins with buying an OTM in-the-money or ATM- at-the-money put option , often referred to as the “Long put.”
• This establishes the trader’s bearish sentiment on the underlying asset.

2. Buy a Lower Strike Put Option:

• As buying a put option naked is risky as there are chances that you might lose the whole premium paid. So to limit the maximum risk and offset potential losses from the long put, a lower strike put option, known as the “short put,” is purchased.
• The long put serves as a form of insurance and reduces the overall capital at risk. But it also limits the profits

Risk and Reward of Bear Put Spread Strategy:

1. Risk is limited

• The maximum loss you can get in a bear put spread strategy is limited to the difference between the strike prices of the long and short puts, minus the net premium paid.
• Risk happens if the underlying asset’s price rises above the strike price of the long put at expiration.

2. Reward is also limited:

• The maximum profit you can get is also capped at the net premium paid and difference between long and short put.
• You can get profit if the price remains below the strike price of the Long put at expiration.

Position Sizing for Bear Put Spread Option Strategy:

1. Risk acceptance:

1. • Always calculate your risk (maximum loss you can face) before initiating a bear put spread.
   • Allocate capital in such a manner that you can manage potential losses.

1. Positron sizing:

1. • Calculate if trade goes wrong how much percentage of capital you will lose.
   • Trade Multiple strike price bear put spread so that your risk spread. It will help you to protect Capital.

Money Management Rule for Bear Put Spread

1. Position Sizing affecting your Portfolio:

1. • Don’t take huge position in bear put spread, though the risk is limited, a huge loss can put a dent in your capital.
   • Make different strategies if your view is bearish. Don’t just rely on Bear Put Spread

1. Maximum Loss Limits:

1. • Set maximum loss per bull put spread based on your Capital.
   • Make sure that a loss in single trade you never lose huge portion of your capital.

When to execute Bear Put Spread:

1. Expecting Price to go down:

1. • Execute a bear put spread when you anticipate a bearish movement in srock or index.
   • Do thorough technical and data analysis to support your bearish view. Like Options PCR is negative, short build up in futures. Price facing rejection at resistance, breaking of support levels.

How to trail and book profits in bear put spread option strategy

1. How to Trail Profits:

1. • When the Long Put you have purchased is 2 to 3 strikes in the money, then trail profits by shifting the positon down, it will protect your profits.
   • Or you can simply adjust the long put by selling one OTM Put

1. How to Book Full Profits:

1. • Book full profits when the stock or index price reaches major support
   • Don’t be greedy and let the profits vanish when you see the change in trend : book profits It’s that simple

How to keep Stop Loss in Bear Put Spread :

1. Set Stop loss in your trading terminal:

1. • Always place a stop loss order in your broker terminal because if the price moves swiftly in opposite direction you will not be facing major losses.
   • Always keep stop loss above major resistance.

1. Why to keep stop loss in system:

1. • Keeping a stop loss in system as soon as you place a order. This will keep you away from being greedy or fearful; it will help you to be emotionally free. However, you can modify stop loss order later, But keep it in system not in you mind.
   • Keeping a stop loss tight will help you to protect your capital so that you can survive for long time.

Key Takeaways:

This is the one of the favorite strategy of professional traders.The bear put spread strategy offers a great risk management by a combination of short and long put options. It helps you to catch a downtrend or price going down without have to worry about huge losses

If you the mechanics, risk and reward profiles, and apply good position sizing with money management techniques with strict stop-loss you can easily make profits whenever you are right.

If you trade with discipline and not take random trades, and take trade only near resistance, in downtrend, when support is broken or when the derivative data is negative the bear put spread can be extremely profitable while managing risk in a volatile market environment.