Options Theory: Bear Put Spreads
December 16, 2021
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.
Read more Options Theory [FREE Content]
Every Thursday our resident options addict, Tyler Craig, will be at the helm to help you demystify derivatives and better understand what truly makes them tick. Options for beginners? Come this way, please. Enlightenment awaits.
Financial freedom is a journey
Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.
Legal Disclaimer
Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.
All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.
