TOOLS OF THE TRADE

THE BEAR PUT

The Bear put is the mirror image of the Bull Call.  It is a debit spread which means that the trader must pay to initiate the trade.  The strategy optimizes a bearish trend and is comprised of two trading instruments. 1) the long put and 2) the short put.  Each of the trading instruments has a purpose.  The long put will gain in value as the underlying stock falls and the short put reduces the cost basis of the trade.

With the high cost of protection in our current trading environment, it may be prudent to consider reducing the cost of the long put by shorting a put against it.  The configuration can either be vertical in the same month of diagonal in different months.  The debit is equal to the cost of the long put minus the credit brought in by the short put.  The debit is the maximum risk and the reward is the difference in the strike prices of the spread minus the debit.  Example: $5 spread minus a debit of $2 equals a $3 maximum reward. 

If you should decide to implement this strategy, it is important to know that the trader has limited downside protection if using this spread to hedge against a bearish move in the stock.  The protection ends at the short put strike price.  For that reason, the short put is best place at or below well defined support, if support is available.

Study the risk graph and you will understand the risk and reward of the position.  Best, Robin

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