Bear Put Debit Spread Option Strategy
What is a Put Debit Spread?
A put debit spread, also known as a bear put spread, is a bearish options trading strategy with a limited profit as well as a limited loss. It gets its name because it creates a net debit to a trader’s account upon order entry.
You can enter a put credit spread by purchasing a put and selling another put with a lower strike price in the same expiration date. The main portion of the trade is based on the long put, which has a higher delta than the lower strike put, making it a bearish trade.
Put Debit Spread Example
Let’s say stock ABC is trading at $50 per share, and you believe it will drop below $45 per share soon. You can construct a put debit spread by purchasing a put with a strike price of $45 and selling a put with a strike price of $40, both with the same expiration date.
If stock ABC moves below $40 per share at expiration, you will realize the max profit. However, if it stays above $45, theta will eat away at the options and the put debit spread will lose money.
Put Debit Spread Max Profit & Loss
The max profit for a put debit spread is calculated as the difference between the strike prices of the two puts minus the net debit paid to open the trade. The max loss is equal to the net debit paid to open the trade.
For example, if you open a 5-wide put debit spread for a net debit of $1, the maximum price it can go to is $5, making the max profit $4 ($400 total).
Put Credit Spread Risk Diagram
Put Debit Spread Breakeven
The breakeven point for a put debit spread is calculated as the higher strike price minus the net debit paid to open the trade. If the stock price is at the breakeven price at expiration, you will not make or lose any money, other than commission fees and slippage.
Put Credit Spread vs. Put Debit Spread
A put credit spread is similar to a put debit spread, but it involves selling a higher strike put and buying a lower strike put within the same expiration date.
The main difference between the two strategies is that a put credit spread generates a net credit upon order entry, while a put debit spread generates a net debit.
Another difference is that the put credit spread is bullish and benefits from theta, while the put debit spread is bearish and gets hurt by theta.
Theta (Time Decay) on Bear Put Debit Spread
Theta, or time decay, measures the rate at which an option’s value decreases over time. For a bear put debit spread, theta works against the trade because it causes the value of both puts to decrease as expiration approaches.
However, since the short put has a lower absolute value than the long put, its rate of decay is slower, which partially offsets the negative impact of theta on the trade.
Implied Volatility on Vertical Put Debit Spread
Implied volatility measures the market’s expectation of future volatility for an underlying asset. For a vertical put debit spread, an increase in implied volatility can increase the value of both puts, which can increase the potential profit of the trade.
However, since implied volatility can also decrease, it’s important to consider its potential impact on the trade before entering it. Ideally, you want implied volatility to increase or stay the same after entering a put debit spread.
Put Debit Spread Calculator
There are several online tools available that can be used to calculate the potential profit, loss, and breakeven point for a put debit spread. The most common is the options profit calculator site.
FAQ
Is the Put Debit Spread Bullish or Bearish?
The put debit spread is a bearish options trading strategy that benefits from an increase in implied volatility.
How does a debit spread make money?
A debit spread makes money when the price of the underlying asset decreases. The put you buy makes money while the put you sell negates some of the theta decay.
Are debit spreads risky?
Debit spreads have limited risk because the max loss is equal to the net debit paid to open the trade. However, like all options trading strategies, they do carry some risk and it’s important to understand and manage that risk before entering a trade.
What is a put vs call debit spread?
A put debit spread is a bearish options trading strategy that involves purchasing a put and selling a lower strike put against it within the same expiration date. A call debit spread, on the other hand, is a bullish options trading strategy that involves purchasing a call and selling a higher strike call against it within the same expiration date.
How do you break even a debit put spread?
The breakeven point for a put debit spread is calculated as the higher strike price minus the net debit paid to open the trade.
What is the max profit on a debit spread?
The max profit for a put debit spread is calculated as the difference between the strike prices of the two puts minus the net debit paid to open the trade.
Is a debit spread bullish?
A call debit spread is bullish, while a put debit spread is bearish.
What are the cons of a debit spread?
One potential downside of a debit spread is that it has limited profit potential. Another potential downside is that it requires an initial outlay of cash to open the trade.
What happens when a put debit spread expires?
When a put debit spread expires, its value is determined by the difference between the stock price and the strike prices of the two puts. If both puts are out-of-the-money at expiration, then both will expire worthless and you will lose your initial investment (the net debit paid to open the trade). If both puts are in-the-money at expiration, then you will receive their intrinsic value (the difference between their strike prices) minus your initial investment.
Can you get margin called on a debit spread?
No, you cannot get margin called on a debit spread because it requires an initial outlay of cash to open the trade. The max loss for a put debit spread is equal to the net debit paid to open the trade.
Is a debit spread a day trade?
A debit spread can be opened and closed within one trading day, which would make it a day trade. If you use a single order to enter and exit the trade, it will only count as one day trade even when you trade multiple contracts.
