A long put vertical spread, also known as a bear put spread, is a bearish options strategy that involves buying a put option at a higher strike price and selling another put option at a lower strike price, both with the same expiration date. This strategy allows traders to potentially profit from an anticipated decline in the underlying asset's price while limiting both potential gains and losses.
Market Outlook: Bearish; expecting the stock price to decline below the higher strike price.
Risk: Limited to the net premium paid (debit) to establish the spread.
Reward Potential: Capped at the difference between the strike prices minus the net premium paid.
Time Decay Impact: Time decay can negatively affect the position, as the value of the options may erode over time if the stock price does not move as anticipated.
The profitability of a long put vertical spread depends on the relationship between the underlying asset's price and the strike prices at expiration:
Maximum Profit: Occurs when the stock price is at or below the lower strike price at expiration.
Maximum Loss: Occurs when the stock price is at or above the higher strike price at expiration, limited to the net premium paid.
Underlying Asset Price at Initiation: $50
Long Put Strike Price: $55
Short Put Strike Price: $50
Premium Paid for Long Put: $3
Premium Received for Short Put: $1
Net Premium Paid (Debit): $2
Breakeven Point at Expiration: $53 (Higher Strike Price - Net Premium Paid)
| Stock Price at Expiration ($) | Profit/Loss ($) |
|---|---|
| 60 | -2 |
| 55 | -2 |
| 53 | 0 |
| 50 | +3 |
| 45 | +3 |
Stock Price at Expiration: The market price of the underlying asset when the option expires.
Profit/Loss: Calculated as the difference between the spread width and the net premium paid when the stock price is below the lower strike price; otherwise, it's the difference between the breakeven point and the stock price, minus the net premium paid.
Maximum Profit: Occurs if the stock price is at or below the lower strike price ($50 in this example) at expiration, resulting in a profit equal to the difference between the strike prices minus the net premium paid ($5 - $2 = $3).
Breakeven Point: Occurs when the stock price at expiration equals the higher strike price minus the net premium paid ($55 - $2 = $53 in this example).
Maximum Loss: Occurs if the stock price is at or above the higher strike price ($55 in this example) at expiration, resulting in a loss equal to the net premium paid ($2).
Limited Profit Potential: The maximum profit is capped at the difference between the strike prices minus the net premium paid, regardless of how low the stock price falls.
Time Decay: As expiration approaches, the time value of the options decreases, which can negatively impact the position if the stock price does not move as anticipated.
Assignment Risk: If the short put option is in-the-money before expiration, there is a risk of early assignment, which could result in the obligation to buy the underlying asset at the strike price.
For investors seeking bearish exposure with different risk profiles, alternative strategies include:
Long Put Option: Involves buying a put option outright, providing substantial profit potential as the stock price falls, but with a higher upfront cost and the entire premium at risk.
Short Call Option: Involves selling a call option, allowing the trader to potentially profit from a stable or declining stock price, with the risk of being assigned the stock at the strike price if the stock price rises above it.
Bear Call Spread: Involves selling a call option at a lower strike price and buying another call option at a higher strike price, both with the same expiration date, to potentially profit from a stable or declining stock price with limited risk.
✔ Lower Cost Compared to a Long Put: The short put reduces the net premium paid.
✔ Defined Risk and Reward: Maximum loss and maximum profit are known upfront.
✔ Moderate Stock Movement Needed: Profitable even if the stock doesn't crash, just declines moderately.
✔ Time Decay Impact is Reduced: The short put offsets the time decay of the long put.
✖ Limited Profit Potential: Unlike a naked long put, the upside is capped at the spread width.
✖ Stock Must Decline Before Expiration: If the stock doesn’t move below the breakeven point, the trade will result in a loss.
✖ Early Assignment Risk on the Short Put: If the short put is in the money, assignment is possible.
Wider Spreads: Provide higher profit potential, but require a greater decline in the stock price.
Narrow Spreads: Are safer, as they cost less and require a smaller move to become profitable.
If the short put is in the money, traders should close the spread early to avoid assignment.
If the stock drops unexpectedly, rolling the short put lower reduces risk and extends profit potential.
If the trade is profitable but still has time left, traders can roll the spread to a later expiration and widen the strike difference to capture additional gains.
If the stock approaches the lower strike price early, traders may exit to lock in profits before time decay erodes value.
If the stock moves against the trade, closing the position before full loss prevents unnecessary drawdowns.
| Factor | Long Put | Long Put Vertical Spread |
|---|---|---|
| Market Bias | Strongly Bearish | Moderately Bearish |
| Maximum Profit | Unlimited | Limited to the spread width minus premium paid |
| Maximum Loss | 100% of premium paid | Net premium paid (lower than long put) |
| Cost | High (since it’s a standalone put) | Lower due to the short put offsetting cost |
| Time Decay Impact | Negative, as puts lose value over time | Less impact due to short put’s positive theta |
| Best Used When | Expecting a strong bearish move | Expecting a moderate price decline |
If capital is limited, the spread reduces the premium cost.
If the stock is not highly volatile, reducing the need for unlimited downside.
If time decay is a concern, as the short put offsets some time decay losses.
Choose a stock or ETF that you expect to decline in price before expiration.
Buy a higher strike put (in the money or slightly out of the money).
Sell a lower strike put (out of the money).
A longer expiration allows more time for the stock to move.
A shorter expiration decays faster but provides quicker results.
Enter an order to buy the put spread using your brokerage platform.
Use a limit order to control execution price.
Track the stock’s movement and adjust the trade if needed.
Consider exiting early if the spread reaches near-maximum profit.
If the stock is below the short put strike price, the spread will expire at full profit.
If the stock is above the long put strike price, the trade will expire worthless with a full loss.
Long put vertical spreads limit risk and reward, making them a cost-effective alternative to long puts.
The strategy works best in moderately bearish conditions, as extreme downward moves still cap profits.
Time decay is mitigated by the short put leg, but managing expiration and assignment risk is crucial.
Traders should monitor stock movement and be ready to exit early to lock in profits or minimize losses.
Since this strategy is a defined-risk trade, it is ideal for beginners who want to trade options with controlled exposure while still benefiting from bearish market trends.
By understanding the mechanics, risks, and profit potential of long call vertical spreads, investors can effectively incorporate this strategy into their portfolios when anticipating bullish movements in underlying assets. However, due to the capped profit potential and the impact of time decay, it's crucial to have a well-thought-out risk management plan and ensure that such positions align with one's risk tolerance and investment objectives.