Now that we have described how to do a Bear Put Spread, let's go through an example. The put options you are going to use for this example are options on the stock: Cisco Corporation (CSCO).

This example comes from the CallsAndPuts.com "Bear Put Spreads" data. Let's go through the procedures step-by-step. To summarize this put option play:



This strategy requires the investor to buy an in-the-money (higher) put option and sell an out-of-the-money (lower) put option on the same stock with the same expiration date. This is also known as a vertical bear put spread. If the stock price closes below the out-of-the-money (lower) put option strike price on the expiration date, then the investor reaches maximum profits. If the stock price increases above the in-the-money (higher) put option strike price at the expiration date, then the investor has a maximum loss potential of the net debit.

Net Debit = Money received from selling out-of-the-money put options - Money paid for buying in-the-money put options
Maximum Profit Potential = Difference Between Strike Prices - Net Debit
Maximum Loss Potential = Net Debit

1) You select CSCO from the "July Bear Put Spreads" listing:

2) You select CSCO based on the criteria you've established for a good Bear Put Spread candidate (This differs for each option investor based on risk versus reward criteria).

3) You access the Stock, Option, BB&RSI links and based on your risk versus reward criteria determine that CSCO is your Bear Put Spread investment choice.

4) Let's also assume that you have an account with ETrade and want to place your option orders for the Bear Put Spread positions.

5) Once you log into your account on www.etrade.com, access the Trading > Enter Option Order link. 

6) Place your option order to buy 5 in-the-money (higher) put option contracts (CWYSM = July $65) by selecting the following fields:

7) This purchase of in-the-money CSCO put options is for 5 option contracts at market price. If you want your purchase to execute at a specific put option price, select the "Limit" radial button and enter the price.  

8) Now place your order to sell 5 out-of-the-money (lower) put option contracts (CWYSL = July $60) by selecting the following fields:

9) This sale of out-of-the-money CSCO put options is for 5 option contracts at market price. If you want your sale to execute at a specific put option strike price, select the "Limit" radial button and enter the price.  

10) If the stock price closes below the out-of-the-money (lower) put option strike price on the expiration date, then the investor reaches maximum profits. If the stock price increases above the in-the-money (higher) put option strike price at the expiration date, then the investor has a maximum loss of the net debit.

In summary:
Net Debit = Money received from selling out-of-the-money put options - Money paid for buying in-the-money put options
Maximum Profit Potential = Difference Between Strike Prices - Net Debit
Maximum Loss Potential = Net Debit

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