Bear Put Spread: An Options Strategy To Try In Declining Markets

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 put option 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).

Source: Options Playbook

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

• Buy an ATM put 
• Sell an OTM put with the same size and at the same expiry

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

Option Strategy Comparisons

Bear Put Spread vs. Bear Call Spread

Source: Options Playbook

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.

Maximum Loss = 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.

Maximum Profit = Net Premium or Credit Received.

Bear Put Spread vs. Bull Put Spread

Source: Options Playbook

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.

Maximum Loss = 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.

Maximum Profit = Net Premium or Credit Received.

Who Can Use the Bear Put Spread?

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.

When to Use the Bear Put Spread

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

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 moving average support or Fibonacci levels.

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 Theta decay). 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.

Buying Bear Put Spread Options

Step 1

Visit the official Bybit website and select USDC Options → Derivatives.

Step 2

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

Step 3

Choose the strike of the put option you want to buy (in this case, ATM), as well as the strike of the put option you want to sell (in this case, OTM).

Step 4

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

Step 5

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

Step 6

Ensure that the information entered is correct, and click on Confirm.

Source: Bybit

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

Breakeven Point

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

Bear Put Spread Sweet Spot

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

Adjustments to Make in Bearish Markets

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.

1. Sell Additional Puts

If you believe that:

1. The price will stay above your long put and 

2. The price won’t go below your short put price for the duration of the trade,

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

Let’s assume your Bitcoin bear put spread costs $1,500. Because Bitcoin went up, selling a Bitcoin put option at a $16,000 strike now gives you $500, and you can sell an additional three put contracts at $16,000 to cover the cost. This turns your bear put spread into a spread that’s almost akin to a

2. Sell a Call Option or a Bull Call Spread

Another strategy when the price starts to go up is simply to sell a call option or a bull call spread. If you believe that Bitcoin’s price won’t go above $22,000, you can sell a $22,000 call option for $600. Selling two and a half of these options will cover the premium cost of your bear put spread. However, this move is considered naked selling and comes with high risk: The maximum loss would be infinite if Bitcoin’s price were to increase infinitely. 

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.

Maximum Take-Profit Potential

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

Maximum Incurred Loss Potential

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

Bear Put Spread Example

Example: Let's presume that Bitcoin is trading for around $20,000. If a trader thinks that Bitcoin is going to decline further in price within 20 days, the trader can set up a bear put spread by purchasing a put option contract with a strike price of $20,000 expiring in around 50 days, for a cost of $2,100.

Let’s say that the trader also thinks that Bitcoin won’t drop below $16,000. In the worst-case scenario, the 300-week moving average Bitcoin has in place will be triggered (this acted as support during the COVID-19 market crash in March 2020). As such, the trader is willing to sell a put option with a strike of $16,000 and earn $600, in order to subsidize the cost of buying the put option. This results in a bear put spread.

In this case, the trader will need to pay a total of $1,500 to set up this strategy ($2,100 – $600), instead of spending $2,100 if the trader only bought put options.

In summary, here’s what we’ve done:

1. Buy an ATM put option expiring 50 days later

2. Sell an OTM put option around $16,000 with the same size and same expiration date

Now, let's explore a few possible resulting scenarios.

Maximum Loss Scenario: If the price of Bitcoin closes above $20,000 upon expiration, the trader will lose the net premium paid of $1,500.

Profitable Scenario: If Bitcoin lands between $18,500 and $16,000 (such as $17,500 upon expiration), the trader will earn a profit of $20,000 (long put strike) − $17,500 (current price at expiration) − $1,500 (net premium paid) = $1,000.

Sweet Spot/Max. Profit at Expiration Scenario: Bitcoin drops to $16,000 on expiration. The trader will earn a profit of $20,000 (long put strike) − $16,000 (short put strike) − $1,500 (net premium paid) = $2,500.

Bear Put Spread Tips

Here are two tips to help you maximize profits from the bear put spread strategy:

• Buy an options expiration date that’s 30 more days than you expect to be in the trade, in order to mitigate the loss of value from rapidly increasing time value decay in the last 30 days of your setup.

• Sell your put option at a strike price where there’s strong support to maximize the profit you receive.

Determining how much capital you can allocate to trading options can be challenging. The rule of thumb for options traders is never to use more than 2 percent of your trading capital to purchase an option (e.g., if your trading capital is $20,000, you shouldn’t use more than $400).

Margin Requirements

All margin requirements for options in the U.S. are regulated by Federal Reserve Board Regulation T, also known as Reg T. For a bear put spread, as long as both positions are maintained, no margin money is required.

Theta Decay Impact

Time decay (or Theta) works against the bear put spread. This means a bear put spread has a negative Theta (loses money with time decay). 

Implied Volatility Effect

In terms of the volatility from the IV spike, it won’t have a huge impact on the bear put spread strategy, as the two will mostly offset each other. However, this is not the case if you're selling a bull put spread.

Benefits

1. The benefit of a bear put spread is that the trader reduces the cost of the trade. If the trader doesn’t expect the price of the asset to drop much below the put option that was sold, this strategy is better than simply buying a put option.
2. A second advantage is that the breakeven price also rises. As a result of setting up a bear put spread instead of only buying a put option, the trader reduces the dollar risk if the trade goes against them — and also increases their probability of profit.
3. Additionally, unlike other advanced strategies such as the butterfly spread strategy, the downside risk of the bear put spread is capped.

Risks

1. The downside of a bear put spread is that there’s limited profit potential as compared to buying a put option. The potential is limited to the difference between the two strikes minus the premium paid.
2. If a trader is expecting a black swan or a capitulation event, it’s preferable to simply buy a put option, as prices may fall far below any support levels.

Alternative Strategies

One alternative to the bear put spread is the ratio put spread, sometimes referred to as a "put back spread." The ratio put spread is similar to the bear put spread, but instead of selling one put option, you sell two or even three put options at the same expiration date to cover the cost of your ATM put option. However, this strategy is very risky and more suited to expert traders.

Conclusion

If what you seek as a trader is to profit from markets going down by a certain amount, the bear put spread strategy could be your best bet. Compared to buying put options, it offers a better probability of profit and reduces your maximum drawdown if you make a wrong decision. A bear put spread is also a great alternative to outright shorting, as it requires less capital to execute.Trade The Bear Put Spread on Bybit Today