8 Minute Read

Options Theory: Bear Put Spreads

December 16, 2021

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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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