What is a bearish put trade?

A bearish put trade, also known as a long put spread, is an options strategy where an investor buys a put option with a higher strike price and sells a put option with a lower strike price, both with the same underlying asset and expiration date. This strategy is employed when an investor expects a gradual decline in the underlying stock's price and aims to profit from this downturn. 1. **Construction of the trade**: The investor buys a put option with a higher strike price (closer to at-the-money) and sells a put option with a lower strike price. This creates a spread for a net debit (or net cost), as the premium paid for the higher strike put exceeds the premium received for the lower strike put. 2. **Profit profile**: The strategy profits if the stock price declines in value, as the investor will have sold the put option at a lower strike price for a premium, which helps offset the cost of buying the put option with a higher strike price. The maximum profit is limited to the difference between the strike prices minus the net cost of the spread, including commissions. 3. **Risk considerations**: The maximum risk is equal to the cost of the spread including commissions. If the stock price does not decline sufficiently, both puts may expire worthless, resulting in a loss equal to the net premium paid. 4. **Mechanics**: The breakeven stock price at expiration is the strike price of the long put (higher strike) minus the net premium paid. The closer the strike prices are to the underlying's price, the more debit will be paid, but the probability is higher that the option will finish in-the-money. 5. **Use of the strategy**: Bearish put spreads are used as an alternative to short selling, offering limited risk and minimal capital requirements compared to selling short shares outright. They are particularly attractive when an investor is bearish on a stock but wants to limit their risk and potential losses. In summary, a bearish put trade is a strategic move in options trading that involves buying a put option with a higher strike price and selling a put option with a lower strike price. It is employed by investors who anticipate a gradual decline in the underlying stock's price and aim to profit from this downturn while managing their risk.