A bear put spread limits risk to the net debit incurred to set up a trade. While shorting a stock has a theoretically unlimited risk, buying a put limits an investor's risk to the put's purchase price. A bull put spread further reduces risk by partially funding the cost of the trade by shorting another put. For example, it might cost an investor $1,000 to buy a single put option on a stock they believe will decline in value. However, they can offset that cost by selling a put option at a lower strike. If the short put sale brings in a credit of $500, the options trader would have lowered their net debit to $500.
Bear put spreads also have a higher return potential. Most options traders aim to set up a bear put spread that can earn returns of 50% to 100% on a successful trade that only requires a slight downward move in the underlying stock by the expiration date.
Bear put spread risks
Bear put spreads cap an investor's risk and profit potential. Their total capital at risk in the trade is the net debit they paid to set up the bear put spread. An options trader could potentially lose that entire investment. For example, if the underlying stock gains value and closes above the purchased put price at expiration, the trade would end in a complete loss of the investor's net debit.
The other risk of setting up a bear put spread is that it caps the trade's profit potential to the difference between the net debit and the spread between the two put options. For example, if the trader paid a $500 net debit and the spread between the two options is $10 per share (or $1,000 per spread), the trade's profit caps out at $500. If shares of the underlying stock cratered, the investor would miss out on that additional profit potential.
