Bear PUT Spread options strategy should be used if the outlook for market (Index or Stock) is Bearish. You should avoid this strategy if your view is slightly bullish or you are not sure whether the market will be bearish or not. This is mainly bearish strategy and works best in that case.
It offers limited loss and limited profit so safeguarding your loss even if the direction goes wrong. So you are not making a naked trade. It is safeguarding you in case view is completely opposite of you initially thought to be. It is combination of below techniques (you can click on the links below to read them in details in case you have not previously.
- Buy PUT Option – You should buy higher strike PUT option
- Sell PUT Option – You should sell lower strike PUT option
- Both of them should be of same Expiry
- Both of them should be on same instrument
This is slightly confusing technique as it involves put options which are not intuitive compared to call ones. So for better understanding of it I would recommend you watching the videos. It explains the concept with example along with profit and loss you would get based on expiry. It will help you create the technique as well. It is better to understand it completely before making a trade as without proper understanding of profit and loss points you may face issues executing it in real world scenario.
If you are new to Options trading then I would suggest you to watch or read the Getting Started tutorial on Options . That will help you understand the strategies as well. Below videos explain the concepts in details so you get an idea on
- When to use the strategy?
- What is profit and loss range of the technique?
- Comparison of it with other techniques
- Explanation with Nifty as an example
English Video
Hindi Video
Conclusion
Sometimes people find it difficult to device a strategy using put as the meaning of ITM and OTM changes for PUT then what it is for CALL. In case you are not comfortable creating a strategy with PUT option then you can use the CALL option strategy for bearish market which we discussed before this article (Bear CALL Spread). Both the techniques are same the only difference is whether you are creating the technique as combination of PE or CE.
I would recommend you practice or understand the techniques involving PUT options as well though they are not that intuitive. But proper grasp of each techniques will help you execute the one which is offering better purchase increasing your chances of making profit. Sometimes creating strategy using PUT option may help as it may have lower premium compared to call as more traders create strategies using CALL option which is easier to visualize.
There are many other options discussed which may be used instead of this one while creating the similar type of setup as discussed in Options trading tutorial series. You may go through those techniques as well if you are not comfortable executing PE setup as it is not that intuitive. Proper understanding of techniques is more important as your success while depend on execution of same.