A bear put spread is an options trading strategy used by investors with a moderately bearish outlook on an underlying asset. It involves purchasing put options while simultaneously writing or selling put options on the same asset, both with the same expiration date but different strike prices.
In this strategy, an investor buys a put option at a higher strike price and simultaneously sells a put option at a lower strike price. The goal is to profit from a decline in the price of the underlying asset while minimising the initial cost of establishing the position. The premium received from selling the put option with the lower strike price partially offsets the cost of buying the put option with the higher strike price, reducing the overall investment outlay.
The bear put spread strategy aims to benefit from a bearish or moderately bearish market scenario, where the asset’s price is anticipated to decrease or remain below the higher strike price by the options’ expiration date. If the asset’s price decreases, both options may expire in-the-money, allowing the investor to realise the maximum profit, which is the difference between the two strike prices minus the net debit paid to initiate the spread.
Traders may employ a bear put spread when they expect a moderate decline in the asset’s price and aim to profit from this movement while controlling the potential loss to a predefined amount.
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