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Bear Put Spread
A trader looking to limit risk and gain limited profit in a falling market will often use a bear put spread in Forex, futures, or stock options trading. The trader uses both fundamental and technical analysis to assess the market. When he or she expects a moderate drop in price of the underlying equity he or she executes a bear put spread. This options strategy limits loss and provides a limited gain when executed correctly. There are various strategies in stock options trading. Spreads are commonly used by professionals who routinely look for moderate gains while limiting the risk in their trading portfolio.
How Does A Bear Put Spread Work?
In a bear put spread a trader both buys and sells put options contracts on the same equity with the same expiration date. One contract is an in the money put with a higher strike price and the other is a lower strike price out of the money put. The trader sells the higher priced put and buys the lower priced put. If the price of the equity falls, the profit is the difference between the two contract prices minus commissions. If the price rises the loss is limited to the difference between the contract prices, minus the initial profit when entering the bear put spread. The following diagram demonstrates the dynamics of a bear put spread.
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