Bear put spread

Definition

A bear put spread (long put vertical, debit) buys a put at a higher strike and sells a put at a lower strike, same expiry. It expresses a decline to (at least) the short strike by expiration with both maximum gain and maximum loss fixed at entry — defined-budget downside exposure, cheaper than an outright put because the short wing rebates part of the cost.

How it works / structure

• Legs: +1 put at K2, −1 put at K1 (K1 < K2), same expiry.
• Cost: net debit D; maximum gain (K2 − K1) − D; breakeven K2 − D.
• Payoff at expiry: at/above K2 lose D; at/below K1 full value; between, gain (K2 − S) − D.
• Parameters (engine-executable): long-strike placement (delta or % OTM), width, DTE, max debit/width rule, exit rules (mgmt-profit-target, mgmt-time-based-exit).
• Greeks profile: net short delta; vega exposure modest and centered between strikes; theta against the position while it waits.
• Skew note: the long (higher) strike is the richer-IV wing in equity smirks — debit put spreads BUY the expensive side; the short wing rebate is what keeps the structure economical (opt-volatility-skew).

When it applies

Targeted-decline theses (to a support level, a valuation level, or an event outcome) inside a defined window; hedging a specific drawdown band on a holding at lower cost than an outright put (strategy-collar is the stock-attached variant); high-IV conditions where outright puts are prohibitively expensive.

Risk profile & failure modes

• Whole-debit loss above K2: a decline that never comes — or comes after expiry — loses 100% of the debit; timing is part of the thesis, not a detail.
• Capped crash participation: below K1 the position stops gaining; in the exact tail it anticipated, an outright put would have kept paying (the rebate’s cost).
• Slow-grind decay: drifting sideways bleeds theta daily; the structure needs the move, not just the direction.
• Early assignment on the short wing in a deep decline (ms-expiration-exercise-assignment).

Evidence & limits

Mechanics are contract arithmetic (OCC/Cboe). As with all directional verticals, no credible public study establishes a class -level edge; outcomes follow the thesis and the entry price against the realized distribution — replay evidence per thesis is the platform’s standard.

Falsifiable-thesis examples

Illustrations only, not signals:

• “X will close at or below K1 at expiry, putting the K2/K1 put spread at full value” — falsified by a close above K1.
• “X will trade below K2 − D (breakeven) within the option’s life” — falsified if the level never prints.

Cross-references

• The other three verticals: strategy-bull-call-spread, strategy-bear-call-spread, strategy-bull-put-spread
• Hedge variant: strategy-collar
• Pricing context: opt-expected-move, opt-volatility-skew
• Management: mgmt-profit-target, mgmt-time-based-exit