The Bear Put
“Okay,”said Aaron,“earlier we saw the bull put.That’s a trade we make in a stagnant or bullish trend. But we can structure another trade with puts to take advantage of a bearish trend. It’s called a bear put: here, we’re using put instruments to optimize a bearish trend. And again, remember that we won’t own the underlying stock; we’ll work only with the put instruments themselves.” (See Figure 40.1.)
“In this trade,” Nate continued, “the long put option is our primary instrument because it’s the one we’re using to make money in the trade; we want it to increase in value so we can sell it to someone else for a profit. Now recall that whenever we use a long put, we need time on our side because we need time for the stock to move down. So we want to have a minimum of 45 days. The short put, however, is our limiting instrument; we use it to take a credit into our account, which lowers our cost basis and thus limits our risk in the trade.”
“So obviously, this is a debit trade,” observed Shorty.
“Right,” answered Aaron. “We’re going to pay more for our long put than we take in for our short put, so we’re going to start out in the hole—with a net debit. Let’s look at the sample option chain to help us see what happens in a bear put.” (See Figure 40.2.)
FIGURE 40.1 The Bear Put
“So here’s what we do,” said Nate. “We open a long put and a short put in the same expiration ...