A commonly used options strategy, the iron condor is a good way of making consistent profits, provided you're familiar with the basics (i.e., puts and calls.) Here's how you can trade the iron condor on Bybit.

In options trading, the iron condor strategy is a neutral approach that combines a bullish and bearish vertical spread on the same underlying asset and comes with controlled risks and profit.

To understand why iron condors appeal to certain investors, let's explore what they are, how traders construct them, and the potential risks and rewards they offer.

Iron condor is an options strategy that combines put and call vertical spreads to create a range of strike prices that achieves maximum profit if all four options expire worthless.

The iron condor strategy is designed to help a trader profit from minor movement in either direction in the market, or preferably no movement at all. Depending on the combination of options (call or put), the strategy can benefit from both low and high volatility.

By default, the iron condor refers to the short iron condor, in which 

when there’s minimal movement in either direction in the market. It’s structured to combine both a 

, and comes with controlled risks and profit.

The name "iron condor" is derived from the shape of the profit-and-loss (P&L) graph it produces, which vaguely resembles the body and wings of a large bird. The image below is a basic representation of the P&L diagram of a short iron condor. 

The spread has four positions (two calls and two puts) and four strike prices with the same expiration date. Here’s how it’s set up: 

, the put strike prices would be to sell $1,100 and buy $1,000, and the call strike prices would be to sell $1,200 and buy $1,300.

Different types of iron condor spreads arise depending on the strike prices of the put and call options, which determine whether the strategy leans bullish or bearish. 

While the iron condor features short volatility or movement, the reverse iron condor (AKA, long iron condor, inverse iron condor) features long volatility or movement.

The reverse iron condor benefits from an increase in 

 or a large price movement in either direction. It’s also a combination of two puts and two calls, but this time in a reversed manner. 

The reverse iron condor is used when there’s a bias for notable price movement in anticipation of high volatility. Profit is recorded if the underlying asset:

1) Closes above the upper OTM strike price at the time of expiration, or 

2) Closes below the lower OTM strike price at the time of expiration.

In traditional finance, a debit is paid to open a short iron condor strategy. It has limited risk: In the worst-case scenario, a trader would only lose the premium paid. On the other hand, the long iron condor is constructed with two debit spreads. Therefore, a significant price change and/or an increase in IV is required before expiration to profit from this setup.

Additionally, time decay works against the short iron condor strategy as it will affect both the long options. For that reason, long iron condors are used much less frequently than short iron condors, where time decay works for traders.

Investors could aim to open a long iron condor if they believe a specific stock price will significantly move in either direction before expiration.

Option Strategy Comparisons (Iron Condor vs. Other Strategies)

Iron condors and iron butterflies are similar options strategies. Both profit by selling volatility and use long positions to limit risk. However, the maximum profit zone for an iron condor is much wider than that of an iron butterfly, and the trade-off of an iron condor is lower profit potential.

An iron butterfly sells a put and call option at the same strike price (usually ATM) and buys two OTM put and call options. It is highly likely that one of these contracts will go in the money (ITM), since it just needs to move one strike away from the current price. The benefit of the iron butterfly is that it allows you to charge a high premium for each contract, since they’re ATM. This strategy is worth implementing if you’re confident that prices won’t move much.

 = Difference Between ATM and OTM Strike Price − Net Premium Received

 = Net Premium received when prices don’t deviate from the current price.

A credit spread is a strategy that involves selling an option and, simultaneously, buying a lower value or further OTM option in order to earn the premium, as long as the price does not move beyond the outer strike price option.

An iron condor is essentially a double-sided credit spread. Because it’s double-sided, the iron condor can provide a larger credit, but it also comes with the risk of loss if the price goes too much in either direction.

Similar to an iron condor, traders' maximum profit is the net premium when using a credit spread. The maximum loss is the difference between the strike prices and the premium received.

 = Difference Between Strike Prices − Net Premium Received

The iron condor spread is an intermediate-to-advanced strategy because of its controlled risk and profit and the complexity of setting up four positions with different strike prices. It’s the combination of a bull put spread and bear call spread to sell volatility, comes with controlled risks and profit, and has the flexibility of leaning bearish or bullish.

This flexibility means that an intermediate trader will benefit from 

. This will help them know which strike prices to set to best maximize the expected value from their trade, rather than only doing a purely neutral setup. Therefore, this strategy is better suited for intermediate traders who can take advantage of neutral, bearish and bullish environments to sell volatility.

Unlike other advanced strategies such as short strangles, where you can incur significant risk, the downside risk of the bear put spread is capped.

The short iron condor is activated when there's no bias on the direction, but a bias on volatility that remains constant or decreases. Traders will opt for this strategy if they foresee minimal price movement on the asset. An example of a period with minimal price movement could be after a large price move due to news. Following a high-volatility event, the asset enters a consolidation period.

The long iron condor strategy is activated when there's no bias on the direction but a bias on increasing volatility. A trader could use a long iron condor to anticipate a big event or piece of news, such as a consumer price index (CPI) inflation number, where the trader believes the markets will move significantly after the news, but is unsure whether it will be up or down.

As the iron condor is a neutral strategy, there are two breakeven points. For a short iron condor, the breakeven points can be calculated as follows:

 Strike Price of Short Call + Net Premium Received

 Strike Price of Short Put − Net Premium Received

For a long iron condor, the breakeven points can be calculated as follows:

 Strike Price of Long Call + Net Premium Paid

 Strike Price of Long Put − Net Premium Paid

A loss on an iron condor will be realized if the underlying asset price closes outside one of the two breakeven prices.

The goal of an iron condor is usually to capitalize on the money you earn from time decay, the drop in volatility, or a combination of the two. If the underlying stock price stays between the short options at expiration, the contracts will expire worthless, and the original net credit received will serve as profit.

However, this doesn’t necessarily mean the investor has to wait until expiration to profit from the strategy. If the strategy is already in profit since volatility has dropped a lot, or the time value has decayed significantly, it may be a good opportunity to close the position for a profit: Buy back the short options, exit either the call or put side of the iron condor, or exit the full position. Doing so means the trader will receive less than the maximum profit potential. However, it also prevents a last-minute tail risk move in the underlying asset's price due to unforeseen events.

With each passing day, the time value of an options contract decreases. This time decay works to the advantage of an iron condor trader, as it turns into unrealized profits. Additionally, if the underlying asset has minimal price movement, volatility is expected to drop, causing the short options to lose value as expiration approaches.

In the event that volatility increases again, or the option moves in one direction aggressively and is outside your range, you can close your iron condor and open it to a new price range — the caveat being that you need to accept some losses.

If a trader believes that this significant price change is only temporary, and that it will eventually return to its previous price range in due time, a trader can choose to close the iron condor and open it at the same price range — but with a later expiration date.

The maximum profit for an iron condor is the difference between the premium received and the premium paid. Profit is achieved constantly if the price remains the same and time passes, known as Theta decay. Profit is gained if volatility drops as well.

A common take-profit target for an iron condor is 40-60%, as it isn’t necessary to wait until the option fully expires.

The maximum loss potential is calculated as the difference between the strike prices of either spread and the premium received.

Losses are reduced constantly if the price remains the same and time passes, known as Theta decay. However, losses are gained if the price goes out of the range of the inner strikes. Losses are gained if the volatility goes up as well.

 = Difference between Inner and Outer Strike Price − Net Premium Received

Let's put everything together and craft an example scenario using sample numbers.

 is trading for around $20,000 after a huge volatility event, and its IV is elevated above its historical averages.

If you think that the price of Bitcoin will stay around the $20,000 mark, and that BTC’s volatility will decrease within 30 days, you can set up an iron condor.

 contract with a strike price of $19,000 expiring in 30 days for a credit (gain) of $1,000, and buy a put option contract with a strike of $18,000 expiring at the same time for a debit (cost) of $700. You can also sell a call option with a strike price of $21,000 for a credit of $1,000, and buy a call option with a strike price of $22,000 for a debit of $700. (These would both be at the same expiration date as the put spreads.)

In this case, you’ll earn a total maximum profit of $600 to set up this strategy ($1,000 − $700 + $1,000 – $700), as long as Bitcoin stays within $19,000 and $21,000 upon expiration. Your maximum loss will be $400 ($1,000 − $600) if Bitcoin’s price goes outside of the outer strike prices on expiration.

One trading strategy tip for an iron condor options strategy is to set it up after a high-volatility event, when volatility typically drops significantly; this is known as an “IV crush.” As it’s not necessary to hold an iron condor position until expiration, a trader may close the position for a larger profit in just a short period of time, long before the expiration date.

 — regular margin (RM) and portfolio margin (PM) — are available on Bybit, with RM serving as the default mode for all options-related transactions.

 by utilizing the trader’s total available balance within the trading pair (e.g., BTC options), while PM combines the positions of the futures and options portfolios to calculate user margin.

 refers to how much time decay affects the total value of a position. For every asset, the total value reduces in relation to the proximity of the expiration date (i.e., the closer a position gets to its expiration date, the lower its value becomes).

Theta works for the iron condor spread. This means an iron condor spread has a positive Theta, since the trader earns money as time passes.

Since the actual volatility of an option can't be predicted before entering a position, the assumption or calculation of 

 (IV) is a consideration in options trading. Volatility shows how much an asset price fluctuates in terms of percentage. In options, as volatility increases, the price of an option rises with it when other factors remain constant.

 is the technical term that represents volatility.

With long options, a trader makes money from an increase in volatility, while with short options, a trader loses money when volatility increases. The reverse is the case when volatility decreases. 

Therefore, short iron condors benefit from a decrease in IV. On the other hand, long iron condors benefit from an increase in IV.

Iron condors allow you to trade with a neutral bias, with the flexibility to create a large buffer to reduce the stress and risk of losing money — something that many traders will no doubt appreciate. This options strategy also allows traders to own positions with limited risk and a high probability of success.

Advanced

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What is an Iron Condor?

A long-term options strategy, we explore covered calls in this article, including what they are, how they work, and why you should use them on your crypto assets.

 strategy used by long-term investors to generate additional income from their crypto portfolio. If managed correctly, selling call options against crypto holdings is a great way to generate positive yield in excess of the underlying asset’s absolute performance.

By selling a call option, the seller (writer) agrees to deliver the option buyer (holder) an underlying asset at an agreed-upon price level (

), at a fixed date in the future (expiration date). For this, the seller receives a payment (premium) from the buyer. The amount of premium received depends on several factors, including the duration of the contract, the underlying market volatility, and the proximity of the strike price to the current market price.

Unlike the seller, the holder of the long call option has no obligation to complete the financial transaction. Instead, they can decide whether to exercise their right to buy the underlying asset at the agreed-upon price — hence, buying an option. 

 against crypto assets already owned, the underlying long position effectively hedges the short call (covers it). This ensures the seller can deliver if the option buyer exercises (calls) their option long.

Strike prices fall into one of three categories:

For call options, an ITM option represents any strike price that is below the current market price of the underlying security. An ATM option is a strike price equal to the current market price, and an OTM option is any strike price above the current market price.

There are two factors to consider before selecting which strike best represents your market view:

Typically, a longer-dated option commands a higher premium than a shorter-dated option. This is because the holder has more time for their option to generate profit. It’s recommended that sellers select a duration that pays an adequate premium, without tying them to an inflexible long-term contract.

Selecting the right strike price is equally important. For this, the seller must decide how far the strike price should be from the current market price. The lower the strike price, the higher the chance it expires ITM and is exercised by the holder. 

The covered call is a neutral options strategy that works best when the price of the underlying crypto asset doesn’t move much while the contract is still active. 

Because the short call limits the upside profit potential, a covered call may not be the best trading strategy for an aggressive investor (

Upside Profit Potential = Strike Price + Premium Received − Transaction Costs

). Similarly, the covered call options strategy performs less well in bearish conditions. If an investor believes the asset price will fall dramatically, it could make more sense to sell their crypto, as the received premium may not offset the drop in the underlying asset.

Another possible scenario is one in which an investor believes the asset price will fall in the near term, but rise in the longer term. Here, buying downside protection, such as a 

One way options traders assess the benefits and risks of a trade is to use “Greeks” to forecast how the position will perform in different scenarios. The Greeks are a set of financial measures that gauge the sensitivity of an option’s price relative to four key variables: 

 is the rate of change in the option price for every $1.00 move in the underlying asset price. For instance, an ATM option, where the strike price is the same as the current price of the underlying, typically has a delta of 0.50. Here, a $1.00 move in the asset price results in a $0.50 change in the option premium. 

 increases as the strike price moves deeper ITM, and decreases as the strike price moves further OTM.

) measures how fast the market is moving. Higher implied volatility (IV) indicates a greater risk of large market moves. As IV increases, the prices of options contracts rise. In contrast, as 

, often referred to as time decay, is the rate at which options prices lose value through the passage of time. 

 measures the rate of change in the option delta for every $1.00 move in the underlying asset. Gamma is at its highest when an option is ITM, and decreases as the option moves further away from the current price.

Because the underlying long position guarantees the call writer can meet their obligations to the buyer, selling covered calls is a relatively low-risk move suitable for traders of all experience levels … as long as they have no immediate plans to sell the underlying crypto asset. That being said, knowing when to employ this strategy can help investors realize their maximum profit potential.

The best time for an investor to open a covered call position is when they believe the underlying asset price will trade sideways — or slightly higher — between the time of the trade and the expiration date. The investor may be neutral, slightly bullish or even slightly bearish. The key takeaway is that the option must expire OTM for the seller to retain their underlying asset.

Apart from understanding the potential payout of an options strategy, it's also important to comprehend the risks involved. One way to measure the price at which a trade makes or loses money is to ascertain its breakeven point.

The breakeven point is the price at which a trade is neither in profit nor loss. For option buyers, it’s the point at which the value of the option increases enough to offset the premium paid. For sellers, it’s the point at which the option loses value equal to the amount of premium received.

When selling covered calls, the writer can work out their breakeven point by deducting the premium from the purchase price of the underlying asset (if acquired at the same time as writing the call), or from the underlying asset price at the time of writing the call (

For instance, if an investor acquires one BTC at $20,000, sells a covered call and receives $500 in premium, the breakeven point is $19,500 (

i.e., BTC Purchase Price − Premium Received

To effectively visualize the price at which an options position will either make or lose money, you can use a profit-and-loss diagram (AKA, a payoff diagram). 

 below shows the profit-and-loss line (orange) of a covered call strategy, where the breakeven point is denoted by the intersection of the orange line with the price line (black).

Above the breakeven point, the profit increases incrementally until the asset price reaches the strike price (in this case, the sweet spot), at which point the position achieves the maximum potential profit.

One disadvantage of the covered call strategy is that it has limited upside profit potential in a rising market. Additionally, the trader will be exposed to significant risk if the value of the underlying crypto asset drops sharply.

There are, however, some methods traders can employ to reduce the odds of losing money. For instance, a drop in the underlying asset price normally results in the option losing value. Therefore, buying back the short call and selling a new strike price closer to the current market (rolling down) increases the amount of premium received. However, if the holder exercises their right to call the option, it also lowers the price at which the option writer is obligated to sell the underlying asset.

In more extreme market declines, the short call may be closed at a profit, and the proceeds put toward buying a near-term protective put option.

When using the covered call strategy, the best possible outcome is if the underlying asset price trades sideways or increases close to — but not above — the strike price at the time of expiration.

As long as the option expires OTM, the buyer is unlikely to exercise their right to buy the asset at the agreed-upon strike price. In that event, the seller keeps the premium and potentially generates profit on the underlying crypto asset.

By selling a call option against your portfolio, you’re hedging against downside price risk and reducing your overall exposure to loss. However, the premium is unlikely to offset a larger 

 in the value of the underlying crypto asset. Overall, the covered call strategy carries almost the same maximum incurred loss potential as an unhedged portfolio.

 at a current market price of $20,000. Although they believe BTC will trade higher over time, they feel the price won't trade at or above $25,000 in the next 60 days. Here, the investor could sell an OTM call option with a strike price of $25,000 (or higher), expiring in 60 days. In return, the holder pays a purchase price of $500.

At expiration, there are two potential outcomes for the option writer:

In both cases, the option writer keeps the option premium. However, the outcome varies depending on how far BTC is trading from $20,000 at the time of expiration.

If BTC is above $20,000 but below $25,000, the seller keeps the $500 premium and also generates a positive return on their BTC long.

However, if at expiration BTC is trading below $19,500, the $500 premium doesn’t offset the loss on the underlying asset. Similarly, if the price is above $25,500, the investor would have made more money by simply not selling the call option. 

Here are some ways to enhance the potential profit from a covered call strategy:

, USDC derivatives account holders with a minimum net equity of 1,000 USDC can benefit from preferential margin requirements when trading 

 perpetual futures and options contracts.

Portfolio Margin mode uses a risk-based approach designed to reduce margin requirements. Like 

, Portfolio Margin mode combines active open positions to determine overall portfolio risk. This method reduces the margin requirement for a covered call strategy by netting the long position (underlying asset) against the short position (short call).

 is the main reason the covered call strategy is so widely used. All things being equal, the option premium loses value as it approaches expiration, and thus works in the option seller’s favor. As shown below, theta decay accelerates as the contract gets closer to the expiration date. For this reason, options sellers benefit from holding their short positions for as long as possible.

The covered call writer takes the view that implied volatility will either remain the same or decrease. Higher IV works against the covered call strategy, whereas a drop in IV is helpful for the option writer, resulting in lower options prices.

Before opening a covered call position, here are three things to consider:

If you are unsure on any of the above points, don’t worry — you can take advantage of our 

 to learn as much as possible before embarking on your options trading journey. By following these steps, you can assess which covered call strategy provides the best opportunity for generating income — at a level of risk you’re comfortable with, and in accordance with your investment objectives.

A variety of options trading strategies are available, each with different characteristics and risk levels. Like clothes, there’s no one-size-fits-all: Though not all strategies may suit every investor, covered calls are definitely a beginner-friendly way for investors to enhance the returns of their crypto portfolios. When managed correctly, covered call writing offers a unique way to make money and hedge crypto holdings against market setbacks. For those willing to learn, you can start trading the 

 listed on Bybit any time you’re ready.

Intermediate

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What is a Covered Call?

If flexibility's your top priority when trading options, the bull put spread is for you. Be as aggressive or as conservative as you want, and take advantage of its low margin requirements.

The bull put spread is a two-legged options strategy used by traders when they believe that the market is moderately bullish. This strategy is identical to the bull call spread in payoff structure, but is slightly different from it in terms of execution. Instead of 

 are used in this strategy — hence the name bull "put" spread. Let's get into the details.

The bull put spread is one of four vertical spread options strategies available. It is an advanced options trading strategy that uses a low amount of capital to profit from a wide range of trading environments.

The bull put spread looks to profit from two options. The first option is bought at a lower strike price and expiration date, while the second is written with a higher strike price, but the same expiration date.

The bull put spread is an options strategy employed by investors who anticipate a slight increase in the underlying asset price. It is a bullish strategy that seeks to profit off a volatile market that’s primed to go up. 

This strategy involves using two options to create a profit range. In its setup, the options trader buys an 

 (ITM) put option. This will create an options range with one high strike price and one low strike price. The difference between the premiums of these two options results in a net credit for the investor.

Premium of OTM Put Option − Premium of ITM Put Option = Net Credit

For example, if a trader thinks that the price of

, trading hypothetically at $20,000, will increase moderately in the near future, they will buy an OTM put option at $23,000 and sell an ITM put option at $18,000. Profit will be made if, at expiration, Bitcoin closes at the $23,000 level or higher. However, the trader will incur a loss if BTC’s price falls below the current market price.

A bull put spread involves writing one put option while concurrently buying another put option, but with a lower strike price and the exact same expiration date.

On the other hand, a bull call spread involves buying one call option and simultaneously selling another call option (for the same underlying asset) with the exact same expiration date, but a higher strike price.

The bull put spread is a highly technical strategy. While not impossible for intermediary-level traders, 

 will likely find the bull put spread easier to execute.

The range of ideal market conditions for a bull put spread is very limited, and most ideal when the market is 

In a full-blown bull market, the bull call spread will help the trader earn more returns than with the bull put spread. In a bearish market, the bull put strategy will result in losses.

The breakeven point of a bull put spread is simply the short put strike minus the premium received. 

Breakeven Point = Short Put − Premium Received

For example, if you sell a bull put spread with a $23,000 short put and collect a $3,220 premium, the position’s breakeven price will be $23,000 - $3,220 = $19,780.

The bull put spread sweet spot is when the stock is at or above the strike B price at expiration. In this case, both options will expire worthlessly. Therefore, the bull put spread option strategy reaps maximum profit that’s equal to the credit taken when you’re entering the position.

If the price of the underlying asset has decreased and the position is under threat, bull put spreads might be modified. To increase the likelihood of success as the trade nears expiration, an investor has two options strategies:

In this strategy, the profit potential is capped. The main opportunity for profit is when the price of the 

 asset is above the strike price at the expiration date. This way, the trader profits on the premium earned. 

Just as the profit is capped, losses using the bull put strategy are also capped. When using this strategy, the worst that can happen is for the price of the crypto to be lower than the strike price (price of crypto < strike price). This will cause the trader to buy the crypto at a loss. Maximum loss can be calculated by subtracting the premium paid from the cost of the strikes.

Maximum Loss = Cost of Strikes − Premium Paid

 on the Bybit exchange, from a first-person POV. 

As an options trader, I believe that the price of Bitcoin (which is currently at $20,000) is going to surge in the next couple of weeks. 

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What Is a Bull Put Spread?

With a capped downside risk, the bear put spread is commonly used when trading options. Here's how you can use this strategy to profit when the market moves down.

In options trading, a bear put spread is also known as a "debit put spread" or a "long put spread." The "bear" in the strategy's name refers to bearish sentiment — betting on the downside of the market. "Put spread" means buying and selling put options with different strike prices, but the same expiration date.

Typically, a bear put spread is used when a trader is expecting the price of an asset to decline. To set up a bear put spread, the trader buys a

 while selling a further out-of-the-money (OTM) put option of the same size with the same expiration date. This allows the trader to reduce the overall cost involved (more on this in the sections below).

Here's how the bear put spread is set up:

A bear put spread is designed to help traders profit from assets moving down. It is cheaper than only buying a put option.

A bear put spread is to bet on prices of the underlying security going down, but what if you're unsure and you prefer to bet on prices not going up? You can consider doing a bear call spread, AKA, short call spread.

A bear call spread is a neutral to mildly bearish strategy that involves selling a call option while simultaneously buying a call option of a higher strike price on the same underlying asset with the same size and expiry date. This way even if the price goes sideways, you receive profits which is the difference between the premium you receive for selling a call option and the premium you paid for buying the call option further out.

 = Difference between strike prices of calls (i.e. strike price of long call less strike price of short call) – Net Premium. Occurs when the option expires above the strike of the call options.

A bull put spread strategy is a neutral to mildly bullish strategy that involves selling a put option while simultaneously buying a put option of a lower strike price on the same underlying asset with the same size and expiry date. This way even if the price goes sideways, you receive profits which is the difference between the premium you receive for selling a put option and the premium you paid for buying the put option further out, and you receive the maximum gain if the options expire worthless.

 = Difference between strike prices of calls (i.e. strike price of long call less strike price of short call) – Net Premium. Occurs when the option expires below the strike of the put options.

Compared to a long put option, the bear put spread reduces the maximum loss that may be incurred, making it potentially less risky for traders. However, it also limits the maximum amount of profit that can be earned. 

To maximize gains from their trades, a trader will need significant technical knowledge to know which strike prices to sell the put options at. Therefore, this strategy is best suited for intermediate and advanced traders.

As its name suggests, a bear put spread is used when a trader believes that the price of an asset will be 

The ideal scenario is when a trader believes that the price of the asset is going to go down in the near term — but won’t go below a certain key support level,which can be ascertained from strong 

In terms of choosing the expiration date or date-to-expiration (DTE), we recommend that you choose a date 30 days longer than you expect to be in the trade (due to 

). For example, if you think the price of Bitcoin will drop within 15 days, or that you’ll be in the trade for 15 days, it’s best to select a DTE close to 15 days + 30 days = 45 days.

Below, we'll walk you through the process of setting up a bear put spread on Bybit.

Pick the desired expiration date, or show all the expiration dates at once, and then pick one.

Review the details of the options and select the ones you want to buy and sell, either by price or action (buy or sell).

 for each buy and sell order to reveal a confirmation tab.

Ensure that the information entered is correct, and click on 

Now that you know how to set up a bear put spread, let's explore a few hypothetical scenarios.

If the price of Bitcoin closes at $18,500 upon expiry, the trader will break even as $20,000 (long put strike) - $18,500 (current price at expiry) - $1,500 (net premium paid) = $0.

Breakeven Point: Long Put Strike Price - Net Premium Paid = Breakeven Point

If the price of Bitcoin closes at the sell put strike price, this is the sweet spot.

Sweet Spot Profit: Long Put Strike Price - Short Put Strike Price - Net Premium Paid

If you enter this bear put spread trade believing that the asset price will go down but it goes up instead, you will start losing money. Here are two ways you can repair the trade.

then you can sell additional puts to cover the net premium paid.

2. Sell a Call Option or a Bull Call Spread

To reduce your risk, you can consider buying further OTM call options to hedge, essentially selling a bull call spread. However, doing this means you’ll need to sell more call options if you want to break even on your bear put spread.

The maximum take-profit potential is unlocked when the price of an asset drops rapidly toward the short put strike price, 

immediately after a trader sets up the bear put spread

. The price drop increases the value of the put option, while having it happen immediately means that the time value remains high. It’s recommended that the trader take some (or all) profits to capitalize on the gains on the bear put spread if the time value, or Theta, is still high. With each passing day, the setup loses money due to Theta decay (also known as time premium).

One important thing to note here is that this time value decay happens more rapidly in the last 30 days of a contract. Therefore, a trader could be correct on the direction of the trade, but the option trade could still lose too much time value. In this case, the trader would end up with a loss. Therefore, it’s always recommended you have both a mental take-profit and stop-loss percentage amount before entering a trade.

Maximum Profit Potential = Long Put Strike Price − Short Put Strike Price

Maximum Profit at Expiration = Long Put Strike Price − Short Put Strike Price − Net Premium Paid

The formula for your potential maximum loss is simply the net premium paid.

Maximum Loss = Cost of Buying Put − Earnings of Selling Put = Net Premium Paid

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