With the market taking a turn for the worse this week, we’re going to look at how to find bearish options trade ideas using the Bear Put Spread Screener.
A bear put spread is a vertical spread that aims to profit from a stock declining in price. It has a bearish directional bias as hinted in the name. Unlike the bear call spread, it suffers from time decay so traders need to be correct on the direction of the underlying and also the timing.
A bear put spread is created through buying an out-of-the-money put and selling a further out-of-the-money put.
The maximum profit is equal to the distance between the strikes, less the premium paid. The loss is limited to the premium paid.
Let’s take a look at Barchart’s Bear Put Spread Screener for today:
Some interesting trades here with impressive Max Profit Percentage. Let’s take a look at the first item in the table – a bear put spread on Penn Entertainment (PENN).
PENN Bear Put Spread Example
Using the October 20 expiry, this trade involves buying the $27.50 put and selling the $20 put.
The price for the trade is $2.07 which means the trader would pay $207 to enter the trade. This is also the maximum loss. The maximum gain be calculated by taking the width between the strikes and subtracting the premium paid:
7.50 – 2.07 x 100 = $543
The breakeven price for the trade is equal to the long put strike, less the premium. In this case, that gives us a breakeven price of $25.43.
PENN Entertainment Inc. is a provider of integrated entertainment, sports content and casino gaming experiences. The company's brand portfolio includes Hollywood Casino(R), L'Auberge(R), Barstool Sportsbook(R) and theScore Bet(R). PENN Entertainment Inc., formerly known as PENN Entertainment Inc., is based in WYOMISSING, Pa.
The Barchart Technical Opinion rating is a 24% Sell with a Weakest short term outlook on maintaining the current direction.
Let’s look at another example this time using Disney (DIS)
DIS Bear Put Spread Example
The DIS example above is also using the October 20 expiry and involves buying the $90 strike put and selling the $75 strike put.
The cost of the trade is $504 which is also the maximum loss with the maximum possible gain being $996. The maximum gain would occur if DIS stock fell below 8 on the expiration date.
The breakeven price is $84.96.
The Barchart Technical Opinion rating is an 88% Sell with an Average short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
Walt Disney Company has assets that span movies, television, publishing and theme parks. In October 2020, Disney reorganized its media and entertainment operations, which had been previously reported in three segments: Media Networks, Studio Entertainment and Direct-to-Consumer & International. From the first quarter of fiscal 2021, Disney began reporting the financial results of the media and entertainment businesses as one segment, Disney Media and Entertainment Distribution (DMED) across three significant lines of businesses: Linear Networks, Direct to- Consumer and Content Sales/Licensing.
Let’s look at another example, this time on Zoom (ZM)
Zoom Bear Put Spread Example
The ZM example from the screener is using the November 17 expiry and involves buying the $70 strike put and selling the $55 strike put.
The cost of the trade is $628 which is also the maximum loss with the maximum possible gain being $872. The maximum gain would occur if ZM stock fell below $55 on the expiration date.
The Barchart Technical Opinion rating is a 56% Sell with an Average short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
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Mitigating Risk
Thankfully, bear put spreads are risk defined trades, so they have some build in risk management. The maximum loss is always limited to the premium paid, so we always know the worst-case scenario.
For each trade consider setting a stop loss of 30% of the max loss.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
