Bear put debit spreads are a type of options trading strategy that involves buying a put option on a stock with a high strike price and selling a put option on the same stock with a lower strike price. The goal of this strategy is to make a profit when the underlying stock's price decreases, while limiting the potential loss to the difference in the strike prices of the two put options, minus the initial cost of the trade. Overall, bear put debit spreads can be a useful strategy for investors who want to take a bearish position on a stock, but who want to limit their potential loss in the event that the stock does not perform as expected.
View Detailed Example
Suppose you believe that a particular stock is going to decrease in price over the next few months. You could buy a put option on the stock with a strike price of $60, and sell a put option on the same stock with a strike price of $55. If the stock's price decreases to $50 or lower, both put options will be in the money, and you will be able to exercise your right to sell the stock at the higher strike price of $60 and buy it back at the lower market price of $50, for a profit of $10 per share. However, if the stock's price does not decrease, or if it decreases but only to a level above the higher strike price of $55, the trade will result in a loss, equal to the initial cost of the options minus the difference in the strike prices of the two put options.
Max Profit: Maximum profit is limited to the in strike values minus the debit.
Max Loss: Max loss is limited to the premium paid.