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 McDonald’s (MCD).
McDonald’s Bear Put Spread Example
Using the December 15 expiry, this trade involves buying the $280 put and selling the $260 put.
The price for the trade is $5.43 which means the trader would pay $543 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:
20 – 5.43 x 100 = $1,457.
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 $274.57.
Let’s look at another example.
Thermo Fisher Scientific Bear Put Spread Example
The Thermo Fisher Scientific (TMO) example is also using the December 15 expiry and involves buying the $520 strike put and selling the $430 strike put.
The cost of the trade is $2,495 which is also the maximum loss with the maximum possible gain being $6,505. The maximum gain would occur if TMO fell below $430 on the expiration date.
The Barchart Technical Opinion rating is an 88% Sell with a Strengthening short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
The market is approaching oversold territory. Be watchful of a trend reversal.
TMO is showing an IV Percentile of 7% and an IV Rank of 10.29%. The current level of implied volatility is 20.78% compared to a 52-week high of 39.84% and a low of 18.60%.
Of the 18 Analysts following TMO there are 12 Strong Buy, 3 Moderate Buy, 2 Hold and 1 Strong Sell ratings.
Let’s look at another example, this time on Morgan Stanley (MS).
MS Bear Put Spread Example
The first MS trade is also using the December 15 expiry and involves buying the $90 strike put and selling the $82.50 strike put.
The cost of the trade is $282 which is also the maximum loss with the maximum possible gain being $468. The maximum gain would occur if MS stock fell below $82.50 on the expiration date.
The Barchart Technical Opinion rating is an 8% Sell with a weakest short term outlook on maintaining the current direction.
MS is showing an IV Percentile of 25% and an IV Rank of 16.77%. The current level of implied volatility is 23.52% compared to a 52-week high of 46.63% and a low of 18.87%.
Of the 15 Analysts following MS there are 9 Strong Buy and 6 Hold 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.
