Bear put spread.
In plain English
A bear put spread buys one put at a higher strike and sells another put at a lower strike with the same expiration date. The premium from the short put covers part of the cost of the long put, so the net outlay is smaller than buying the put alone. In exchange, the profit stops growing once the stock falls below the lower strike. Maximum loss is the net premium paid. Maximum gain is the width between the strikes minus that premium.
01Why it matters
The most that can be lost is fixed at the start, which is a different risk shape from shorting a stock, where losses have no natural ceiling.
02The math, step by step
Say a stock trades at 100. A trader buys the 100 put for 6 and sells the 90 put for 2, a net cost of 4 per share, or 400 for one contract. If the stock ends at or below 90, the spread is worth the full 10 point width, so profit is 10 minus 4, or 6 per share (600). If the stock ends above 100, both puts expire worthless and the loss is the 400 paid.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
It is not a short sale. A short seller borrows shares and faces losses that grow as the price rises, with no fixed limit. A bear put spread risks only the premium paid, and it ends on a set date whether or not the view turns out to be right.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice