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What is a bear put spread?
See how buying a higher-strike put and selling a lower-strike put limits both cost and potential profit
Prepared by Mark · Primary sources below
Direct answer
A bear put spread buys a put and sells another put with the same expiration at a lower strike. The short put helps reduce the initial debit, but it also caps the value of the spread if the stock falls below the lower strike. At expiration, the maximum loss is generally the debit paid and the maximum gain is the strike width less that debit
It is a bearish vertical spread
The higher-strike long put gains value as the stock falls. Selling the lower-strike put contributes premium to the trade, leaving a smaller net debit than a standalone long put
The strike width sets the payoff ceiling
Once the stock is at or below the lower strike at expiration, both puts are in the money and their values offset beyond the width between strikes. Further stock declines do not increase the spread's expiration value
Short-option mechanics still matter
The short put can be assigned before or at expiration. The long put can cap the defined payoff, but it does not remove the need to understand exercise, assignment, account buying power, and expiration handling
Sources and further reading
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