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.
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.