Options Trading Strategies: Bear Put Spread
A bear put spread (long put spread) is a two legged strategy that consists of one short (sold) Out of The Money put and a long (bought) In The Money put, with the same expiration date.
When to use this strategy?
You are moderately bearish and expect the price of the BTC/ETH will fall in the near future. Also, beside the long put strategy, bear put spread is an alternative to direct shorting of the underlying security with less risk.
Below is a Profit and Loss chart example of the bear put spread options strategy:
Pros:
Less risky and expensive as compared to buying a put alone. Maximum loss is capped.
Cons:
You can achieve high gains only if you select deep Out of The Money strikes, and that undermines your chances that a BTC/ETH price will fall that low. Also, less risk brings you less gain as your maximum profit is capped.
Example:
In this example, BTC is trading at 37,910.80 USD, and you expect its price to moderately fall. You have sold an OTM put with a strike price of 37,000.00 USD, and bought an ITM put with with a strike price of 39,000.00 USD, both with an expiration date of February 11th 2022. As this is a debit spread, and a long put costs you more than a premium from a short put you have paid a net premium of 990.52 USD, which is also your maximum loss.
The Profit and Loss chart is given below:
Upon expiration:
If the BTC price is at or above the higher strike price, then both options expire worthless, and you are at maximum loss.
If the BTC price is between the strikes and below the break even point you are in the profit.
If the BTC price is below the lower strike. In this case the long put is exercised, and the short put is assigned. This means that BTC is sold at the higher strike price and bought at the lower strike price, and you achieve the maximum profit minus the net premium.
| BTC at Expiry (USD) | Payoff (USD) |
|---|---|
| 37,000.00 (strike price SP) | +1,009.48 (max gain) |
| 37,167.00 | +842.48 |
| 37,557.00 | +452.48 |
| 37,879.00 | +130.48 |
| 38,009.48 (break even) | 0 |
| 38,138.00 | -128.52 |
| 38,502.00 | -492.52 |
| 38,848.00 | -838.52 |
| 39,000.00 (strike price LP) | -990.52 (max loss) |