This video walks step-by-step through the bear put spread strategy and how to build it in Thinkorswim (TOS).
Notes
Bear Put Spread
AKA: Buying a put vertical spread, Put vertical Debit Spread, Long put vertical spread
Bias: -2, -3, Low implied volatility, Bear Retracement, Bear Breakout
Structure: Buy a higher strike put while selling a lower strike put in the same expiration month. Usually we buy around ATM put and sell an OTM put.
Use 1-month options: more aggressive – make money quicker/lose money quicker
Use2 or 3-month options: more conservative – make money slower/lose money slower
Delta Guidelines: The higher the net delta, the more aggressive the trade. Wider spreads ($10-wide vs. $5-wide) carry higher net delta.
Buy 100 put, sell 95 put: $5-wide spread
Buy 100 put, sell 90 put: $10-wide spread
Buy -50 delta put, sell +25 delta put: Net Delta -25.
ROI Guidelines:
$5-wide spread: Pay $2 to make $3, ROI 150%
$10-wide spread: Pay $4 to make $6, ROI 150%
If you pay more than that, the ROI goes down, but it’s a more conservative trade.
Risk/Reward Formulas:
Max Risk: Net Debit, lose if both puts expire OTM at expiration.
Max Reward: Spread width – net debit, capture if stock falls below the lower strike put and both puts are ITM at expiration.
Probability of Profit: Delta of short put
Trigger: Same as other bear trades. Depends on the patterns. Below prior day’s low or below support
Stop Loss:
1) If you’re willing to incur max loss, you don’t need a stop loss.
2) Exit if stock breaks above major resistance.
Target
1) Exit at the short strike price.
2) Exit if you capture 60% to 80% of max gain.
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