1. WOW15– Trading Bear Put Spread
Host: Georgio Stoev, Product Manager
Guest: Patrice Henault, Head of Futures & Listed Options
December 9, 2018

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3. Week 15 The Bear Put Spread
Market Review
Bear Put Spread
Risk Management of a Bear Put Spread Position
Netflix Bear Put Spread Example
Apple Bear Put Spread Example

4. Bear Put Spread What are Bear Put Spreads?
The Bear Put Spread is employed when you think that the price of the underlying asset will go down moderatley in the near-term
Why trade a Bear Put Spread?
By shorting the out-of-the-money put you reduce the cost of establishing the bearish position but forgo the change of making a large profit if the underlying plummets
The Bear put spread is also known as Debit Put Spread as one pays a premium when entering the trade
How to place the trade?
Buy ATM Put & Sell OTM Put
When to trade the Bear Put Spread?
The Bear Put Spread are better used in the retracement wave of a bullish trend using fibonacci retracement to place the Short Strike But it can be use with chart pattern as well for bearish movement.

5. Risk Management of a Bear Put Spread
Invest no more than 2% of your account value, e.g. $50,000 risk $1000 on any given trade
Understand your risk/reward profile at expiry:
Maximum Risk and Maximum Loss
Your maximum risk is limited to the premium you pay
Maximum loss occurs when price of underlying >= Strike Price of Long Put
Maximum Profit
Max Profit = Strike Price of Long Put – Strike Price of Short Put – Premium Paid
Max profit acheived when price of Underlying <= Strike Price of Short Put
Breakeven Point
= Strike Price of Long Put – Premium Paid

6. Netflix Bear Put Spread Example
After a nice ride from (on May 4) to a high of (on Aug 5) Netflix is now toppish and Stochastics and RSI are giving us a selling signal. We also have an RSI bearish divergence. Let's buy the Aug 15 (Expiry 21 Aug) 120/110 Put Spread to play a correction to (38.2% of retracement of 78.90/129.29).
Management and risk description
Entry: Buy Aug15 120/110 Put spread at $ => Buy Aug Put at $ &  Sell Aug Put at $ Maximum Profit at expiry is limited
Maximum profit at expiry achieved when underlying price =< short strike price At expiry maximum profit  = Long Strike Price minus Short Strike Price minus Premium Paid = – = 7.30
Return on Investment if the market close at or below 110 at expiry
= Profit/Premium Paid X = 7.30/2.70 X = %
Maximum Loss
Maximum loss is limited to premium paid. maximum loss is $2.70
Break even point at expiry
= Long Strike – Premium Paid = 120 – =

7. Netflix Bear Put Spread Example
The August /110 Put spread on Netflix we bought on August 11 expires today.
Let's take our profit.
Management and risk description
Entry: Sell back Aug15 120/110 Put Spread (we bought at 2.70 on August 11) at 8.30
=> Sell back Aug Put at 13.10
& Buy back Aug Put at 4.80
Profit is:  Exit Price – Entry Price
8.30 – 2.70
5.60
Return on investment
= Profit/Premium X 100
= 5.60/2.70 X 100
= 207 percent

8. Apple Bear Put Spread Example
On the 11 December Apple broke through the trend of support of a daily triangle and the 10 & 20 days moving average were giving us a selling signal.
Management and risk description Entry: Buy the Jan16 110/105 Put Spread at => Buy the Jan Put at & Sell the Jan Put at 2.43
Maximum Profit at expiry is limited Maximum profit at expiry achieved when underlying price =< short strike price At expiry maximum profit  = Long Strike Price minus Short Strike Price minus Premium Paid = – = 3.08
Return on Investment if the market closes at or below $110 at expiry = Profit/Premium Paid X = 3.08/1.92 X = 160%
Maximum Loss Maximum loss is limited to premium paid. maximum loss is $1.92
Break even point at expiry = Long Strike – Premium Paid = 120 – =

9. Apple Bear Put Spread Example
On the January 11th Apple start to bounce back. Stochastics and RSI are giving us the signal to take profit and sell back the Put Spread.
Management and risk description Entry: Sell back the Jan16 110/105 Put Spread at => Sell back the Jan Put at & Buy back the Jan Put at 8.01
Profit is: Exit Price – Entry Price
4.23 – 1.92 = 2.31
Return on Investment:
= Profit/Premium X = 2.31/1.92 X = 120%

10. Bear Put Spread Summary
Outlook: Bearish on the underlying with a view that the stock will go down moderatly during the term of the options
In general buy a one-month spread (Long ATM/Short OTM)
If you think you’ll have a sharp move for the next 2 weeks you can buy a 2 weeks strike slightly OTM.
As you are buying a Put Spread you don’t pay margin you just pay a premium upfront. Your maximum loss at expiry will be no more than the premium paid. You can sell back your Put Spread anytime before expiry.
When should investor’s exit the position?
Idealy at price target or when technical indicators become oversold.
Always sell back the Put Spread before expiration.
I like to use a Bear Put in retracement wave because it is easy to define your strike price.

11. Questions? PHE@saxobank.com GEOS@saxobank.com References:
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