Bear Spread

Definition

A bear spread is a type of option strategy used in options trading. It occurs when an options trader purchases a contract at a higher strike price and sells at a lower strike price. For example, an investor purchases a contract with a strike price of $150 and sells the contract with a strike price of $100. The bear spread strategy is used when a trader wants to maximize profit of a price decline yet limiting possible losses that could happen from a sudden price decrease.

Other Information

An investor must first own a put option contract before being able to make use of the bear spread. The purpose of using the bear spread strategy is not only to make profits from it but also, protect the investor's current position. The bear spread is categorized into two, namely;

• Bear Put Spread; has to do with purchasing a put to make profit from the expected decline in an asset, and selling a put with the same expiration date at a lower strike price for the purpose of generating revenue to offset cost.

• Bear Call Spread; has to do with selling a call to generate revenue and the purchase of a call with the same expiration date at a higher strike price for the purpose of limiting the upside risk