The Bear Spread Option Trading Strategy

A bear put spread is the simultaneous purchasing and writing of two put options. This spread has the advantage of lowering the cost of the initial investment as well as defining a set maximum loss and maximum profit. It also features greater price stability throughout the life of the spread as compared to just buying one put, which could lose and gain value dramatically overnight.

Since time has a lot to do with value, the markets may go in your favor, but there may be a lot of time until exercise still left with the options. This is a scenario that is undesirable because the markets have moved in your favor, yet you cannot be fully rewarded with the bear put spread if there is a lot of time left before exercise.

With bear put spreads, either the market is in your favor, or time is in your favor--never both.

Which exercise price to choose is a major issue. You will generally have three choices: above the market, at the market or in the money. Above the market holds the highest potential for greatest investment returns.

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