N° 08Multi-leg strategy

Bear Put Spread.

Buy a put and sell another one, lower, same expiry. The exact mirror of the bull call spread: the downside is played at a reduced cost, and the gain stops at the short strike.

Outlook : moderately bearishRisk : moderate

Payoff simulator at expiration

Max gain

$600

Max loss

$400

Breakeven(s)

$106.00

Parameters

Current stock price · $Strike of the put BOUGHT · $Premium (per share) · $Strike of the put SOLD · $Premium collected on the short put · $

1 contract = 100 shares. All values are per share unless otherwise noted.

When to use it?

A decline seen as likely but bounded — a stock returning to a known level rather than collapsing. The short put funds part of the purchase.

When to avoid it?

Hedging against a violent shock: the gain stops at the short strike, precisely where protection would matter most.

How it works

Two legs, same expiry: • BUY a put at the higher strike — the leg that profits from the decline. • SELL a put at the lower strike — the premium collected reduces the outlay. The net debit is the maximum loss; the distance between the strikes, minus that debit, is the maximum gain. At expiry: • Above the higher strike: both expire worthless. Loss = net debit. • Between the two: the long put has value. The gain grows as the stock falls. • Below the lower strike: both have value and the difference is fixed. The gain stops moving.

Concrete example

Stock at $100. Buy the 110 put at $6, sell the 100 put at $2. Net debit: $4 × 100 = $400. • Stock at $120 → both expire worthless. Loss = $400. • Stock at $106 → breakeven (110 − 4). P&L = 0. • Stock at $102 → gain = (8 − 4) × 100 = $400. • Stock at $100 → maximum gain = (10 − 4) × 100 = $600. • Stock at $40 → still $600. The further collapse is absorbed by the short put.

What the diagram does not show

A bear put spread looks like insurance, but differs on the point that matters: it stops paying just as the damage worsens. A bounded downside position covers an ordinary correction, not a crash. The SHORT put also carries assignment risk: the delivered stock must be bought at the strike, which ties up the matching capital.

⚠ AMF disclaimer

Options are high-risk derivative products. Losses can exceed the capital initially committed (particularly for uncovered short positions). Polaris provides educational content only — this is not investment advice. Consult a registered advisor (AMF) before any decision and make sure you have the appropriate level of approval from your broker.

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How it works

Concrete example

What the diagram does not show