Bear Put Spread is a strategy that must be devised when the investor is moderately bearish on the market direction and is expecting the underlying to fall in the short-term.
A Bear Put Spread is formed by buying an In-the-Money Put Option (higher strike) and selling Out-of-the-Money Put Option (lower strike). Both Put options must have the same underlying security and expiration month.
The investor has to pay a net premium because the Put bought is of a higher strike price than the Put sold.
The net effect of the strategy is to bring down the cost and raise the breakeven on buying a Put (Long Put).
Investor view: Moderately bearish on the Stock/ Index.
Risk: Limited to the premium paid.
Breakeven: Strike price of Long Put – net premium paid.