A bear spread is a vertical spread that aims to profit from a stock that is declining in price. As the name suggests, it has a loaded directional bias. Unlike the bear call spread, it suffers from time decay so traders need to be accurate on the underlying as well as the direction of the time.
A bear spread is created by buying a non-currency and selling more non-currency.
The maximum profit is equal to the distance between the strikes, less the premium. The loss is limited to the premium paid.
Let’s take a look at Barchart’s Bear Put Spread Screener for today:
Some interesting trades with amazingly high profit percentages. Let’s look at the first item in the chart – a bearish spread on Cisco (CSCO).
An example of a CSCO bear spread
Using the January 19 expiration, this trade involves buying the $52.50 put and selling the $37.50 put.
The trade price is $2.57, which means the trader will pay $257 to enter the trade. This is the biggest loss. The maximum profit is calculated by taking the spread between the strikes and subtracting the premium paid.
15 – 2.57 x 100 = $1,243.
The breakeven price of the trade is equal to the long strike, less the premium. In this case, that gives us a price of $49.93.
Let’s strengthen our bear screen by adding a measure for any stock that is over 40% oversold. Here are the results:
Bank of America bears the example of distribution
The first example involves using the January 19 expiration and buying the $26 strike and selling the $18 strike.
The price of the trade is $147, which is the maximum loss, and the maximum profit is $653. The maximum profit is made if Bank of America (BAC) stock falls below 18 on the expiration date.
Barchart’s technical opinion level is 100% Sell, strengthening the short-term trend to maintain the current trend. Long-term indicators fully support the continuation of the trend.
BAC is showing IV percentage of 69% and IV level of 34%. The current implied volatility level is 30.93% with a 52-week high of 50.80% and a low of 20.48%.
Out of 19 analysts following BAC, there are 8 strong buy, 1 neutral buy, 8 hold, 1 neutral sell and 1 strong sell recommendations.
Let’s look at another example, this time at Starbucks (SBUX).
An example of a Starbucks bear spread
The first Starbucks example involved selling the $75 strike by using the January 19 expiration and buying the $95 strike.
The trade price is $490, which is the maximum loss, and the maximum profit is $1,510. The maximum profit is achieved if SBUX stock falls below $75 on the expiration date.
Barchart’s technical opinion rating is 88% Sell with an average short-term view to sustain the current trend. Long-term indicators fully support the continuation of the trend.
SBUX is showing IV percentage of 90% and IV level of 64%. The current implied volatility level is 32% with a 52-week high of 40% and a low of 18%.
Of the 25 analysts following SBUX, there are 10 strong buy, 1 moderate buy and 14 hold recommendations.
Starbucks is scheduled to report earnings on November 2.
Fortunately, bear spreads are risk-defined transactions, so they have some built-in risk management. The BAC example has a potential loss of $147 and the SBUX trade has a risk of $490.
Consider setting a stop loss of 30% of the maximum loss for each trade.
Please remember that options are risky and investors can lose 100% of their investment. This article is for educational purposes only and not for business advice. Always remember to do your own due diligence and consult your financial advisor before making any investment decision.
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As of the date of publication, Gavin McMaster has no place in the warranties (express or implied) mentioned in this article. All information and data contained in this article are for informational purposes only. For more information, please see Barchart’s Disclosure Policy here.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.