Innovated Tips from Better Trades

Bear Put Spreads (Debit Spreads)
For investors who are generally bearish about a stock an are looking for a low risk strategy that has a net debit.

Example	Increase in Volatility	Time Erosion
??buy put (higher strike) ??sell put (lower strike)	Increase in implied volatility hurts position unless stock price drops at the same time.	hurts position

When your feeling on a stock is generally negative, Bear Put Spreads are nice low risk, limited reward strategies. To create a Bear Put Spread you will use put options at or near the current market price of the stock.

Like bear call spreads, bear put spreads profit when the price of the underlying stock decreases. Typically buying near the money puts and selling out-of-the-money puts creates the bear put spread. Going back to the Bubba Gump example, if you have a bearish short-term feeling when the stock is trading at $46, you might initiate a bear put spread by buying the 45 put @ 7 and selling the 40 put for 3.

Stock: $46
Buy one 45 put @ 7	($700)
Sell 1 40 put @ 5	$500

Net Debit	($200)

Maximum Profit	$300
Maximum Loss	$200

In this case, the maximum profit would be the difference between the strike prices less the $200 it cost to put on the position. In this case, the maximum profit works out to be $300 ((45 - 40 x 100) - $200).

In contrast, the maximum loss would be limited to the $200 spent initiating the trade. Once again, this is a debit spread, and in order for this trade to see it maximum profit it will require four commissions.

If you like the idea behind the bear put spread, be sure to check out bear call spreads, as this type of spread is a credit spread and requires only two commissions to accomplish your objectives.

Stock Price at Expiration	Profit (Loss)	Return on Investment*
$50	($200)	(100%)
$45	($200)	(100%)
$44	($100)	(50%)
$43	$0	0%
$42	$100	50%
$41	$200	100%
$40	$300	150%
$30	$300	150%

*This example does not factor in commissions, interest or tax consequences.