Bear Put Spread - Bearish Options Trading Strategy
A Bear Put Spread is a stock option trading strategy employed when the market is volatile and moderately bearish. In such instances, an investor will look to make profitable trades that do not incur high risk. The Bear Put Spread method, also known as Vertical Bear Puts, is used by successful traders in such times to realize profits when the market is looking to the money of the investor.
The profit and loss strategy for a Bear Put Spread is very similar to a Bear Call Spread. The investment timing and stock market strategy for a Bear Put Spread is as follows. A trader will buy a put option on a particular stock that is out-of-the-money and will sell an out-of-the-money put on the same stock. For this method, both options should have the same expiration date. With a Bear Put Spread, the trader does not immediately realize the net premium when establishing the position as is the case with a Bear Call Spread. In a Bear Put Spread, the investor must wait until the expiration date to see any profit. While the trader doesn’t have money in hand, the profit potential is greater with a Bear Put Spread.
As noted above, the Bear Put Spread is more risky than a Bear Call Spread, but the potential for profit is greater than implanting the call spread. In a Bear Put Spread, if the stock price increases above the in-the-money (higher) put option strike price at the expiration date, then the investor has a maximum loss potential of the net debit. Conversely, the maximum profit potential involved in a Bear Put Spread occurs when the stock decreases below the out-of-the-money (lower) put option strike price. In a Bear Call Spread, the maximum profit potential is limited to the premium collected for the calls sold, less the cost of the premium paid for the calls that were purchased. Both strategies can be utilized in a bearish market, and care should be taken to understand the risk reward ratios for each strategy
Successful trading includes such techniques as Bear Put Spreads. When an investor, through stock technical analysis, becomes aware of a bear market, it is imperative to modify his, or her, stock market trading system. A trader will find more opportunities for profitable trading in a bull market; a bear market typically requires a trader to be more conservative in order to minimize risks and find trades that, while lucrative, are less risky. A Bear Call Spread is a perfect example of such a conservative move to create profits.
A stock trading plan is imperative during a bearish period of trading, and it is necessary for the investor to follow his / her plan faithfully. This requires solid stock market technical analysis, stop loss strategies, and utilization of a stock trading system such as Japanese Candlesticks. This system, which was utilized successfully for rice options trading in Japan in the 17th century, helps the investor to evaluate the data obtained through technical analysis. While a stock investing system such as Japanese Candlesticks is invaluable in any period, it is especially valuable in bearish times, since it assists the trader in drawing conclusions about the movements of the market at a time when it is most unpredictable.
A Bear Put Spread is one technique that an investor can use to make money during a bearish market or a market experiencing stock volatility. Through fundamental and technical analysis and learning how to read stock charts, a trader can focus on making money even when the market wants to take money from its investors.