Trade the downside of the market with Bear Put Spread
Hello Fellow Traders
A Bear put spread is a strategy that reduces your risk or exposure, reduces the debit amount spent but it also caps your profit.
Ask yourself when you buy a put and the stock goes up and you’re in the red how do you feel?
Do you emotionally feel upset that you got your strategy right but the timing wrong, just after you entered the trade the stock went up in price so your put came down in price.
You hold a current loss.
You got the trend right but the exact timing wrong it may be due to the volatility in the market as the options are wildly swinging up and down.
Want to feel better about the current loss then this strategy may just suit you.
Rules to a bear put spread
!) Buy the higher strike
You have the right but not the obligation to sell the stock at the strike price
2) Sell the lower strike
You are obligated if exercised to buy the stock at the strike price; they will only exercise if the stock is below $125 in September.
With a bear put spread the market can go up and both lose money so you can feel ok about the loss on the bought one because you have the sold one to offset the current loss.
You then have an opportunity to buy the sold one back cheaper and keep the long one owned for a reduced price.
Let me give you a current example on FXE taken straight from my trading account so you can see how it looks as the trade plays out.
Original purchase on September puts
Bought 135 strike $5,50 x 10 contracts = $5,500
Sold 125 Strike $2.00 x 10 contracts = $2,000
Nett Debit Cost $3.50 x 10 contracts = $3500
So the 135 put can reduce in price to $3.50 and your not losing money.
Short the Euro
The blue line is the bought one which is in credit.
The red line is the sold put which is a debit as it will cost you more now to buy it back if you want to sell out of both trades.
So exiting now means:
Sell the 135 at $7051.86 profit
Buy the 125 back at $3168.14 loss
Realise a profit now of $3883.72.
If you stay in the trade and it stays below $125 in September you make the difference between $125 and $135 = $10,000 – Nett debit cost $3500 = $6,500 Profit
Your ideal outcome is – you want the stock put to you at the 125 strike as you can put it back at 135 profiting the difference.
Feel free to start a discussion or questions on this so we all learn.
Trader Lyn
