With volatility at the lowest levels in two years, options are cheap so it’s a good time to check in on our 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 Short 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 Exxon Mobil (XOM).
Exxon Mobil Bear Put Spread Example
Using the August 18 expiry, this trade involves buying the 110 put and selling the 95 put.
The price for the trade is $4.36 which means the trader would pay $436 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:
15 – 4.36 x 100 = $1,064.
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 105.64.
Let’s look at another example.
General Motors Bear Put Spread Example
The General Motors (GM) example is using the September 15 expiry and involves buying the 37 strike put and selling the 30 strike put.
The cost of the trade is $213 which is also the maximum loss with the maximum possible gain being $487. The maximum gain would occur if GM fell below 30 on the expiration date.
GM is showing an IV Percentile of 0% and an IV Rank of 0%. The current level of implied volatility is 30.64% compared to a 52-week high of 59.58% and a low of 30.64%.
Of the 15 Analysts following GM there are 5 Strong Buy, 2 Moderate Buy, 7 Hold and 1 Strong Sell ratings.
Let’s look at another example, this time on Bank of America (BAC).
BAC Bear Put Spread Example
The first BAC trade is also using the August 28 expiry and involves buying the 30 strike put and selling the 27 strike put.
The cost of the trade is $97 which is also the maximum loss with the maximum possible gain being $203. The maximum gain would occur if BAC stock fell below 27 on the expiration date.
The Barchart Technical Opinion rating is a 56% Sell with a weakest short term outlook on maintaining the current direction. Long term indicators fully support a continuation of the trend.
BAC is showing an IV Percentile of 11% and an IV Rank of 8.57%. The current level of implied volatility is 24.83% compared to a 52-week high of 50.80% and a low of 22.40%.
Of the 20 Analysts following BAC there are 10 Strong Buy, 1 Moderate Buy, 7 Hold, 1 Moderate Sell and 1 Strong Sell recommendations.
Mitigating Risk
Thankfully, bear put spreads are risk defined trades, so they have some build in risk management.
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.
