Bear put spread stock option trading strategy

What is a bear put spread?

A trader or investor who initiates a Bear Put spread option strategy (debit spread) may wish to do so because he or she believes that there will be an decrease in the underlying security.

A Bear Put spread is a directional trade in which realizes its maximum profit when the underlying stock decreases beyond the short Put strike Price.

The maximum loss on the trade is limited to the premium paid for the spread. This is one of the most attractive aspects of this stock option position. The fact that you can play the downside of the stock with-out shorting it is a beautiful thing. Especially given the fact that your maximum risk on the trade is capped to the premium paid and you can always exit the position or make adjustments if the trade goes against you.

It is also important to understand that changes in implied volatility has a different effect depending on weather the position is profiting or not. the same can be said for the passage of time (theta) regarding the position. (Theta and Vega are very important concepts regarding the purchase and selling of option contracts.).

It is also worth taking note of the fact that by selling the short Put you are in fact reducing the cost of the long put option which also adds to the attractiveness of the overall position, but you also loose all potential profits below the short put strike.

Always take into consideration risk management. Lock in profits and cut short the losers. Trade with a plan at all times. You do not want to be the trader that makes decisions with your stomach. Your tummy does not have the capacity to be a good trader. If you are trading with emotion, you have already lost the game before you even clicked the buy or sell button.

Emotion is your enemy and risk management along with a plan is your only friend.

Substantial profits can be made in weeks, days, hours or less than a minute in the options market. But without proper risk management, knowledge and control, you mind as well donate your entire trading account to the salvation army and take advantage of a nice tax write off. Because without a plan, your finished before you even start.

Start trading small. If you can make money with a few hundred dollars, what on God's good earth makes you think that you can make money trading stock option contracts with a few thousand.

The biggest part of the game, is staying in the game. The market can be your best friend or your worst enemy. Stay in the game and learn learn learn!

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