Module 6 Option Strategies

Chapter 7

Bear Put Spread


7.1 – Spreads versus naked positions

Over the last five chapters we’ve discussed various multi leg bullish strategies. These strategies ranged to suit an assortment of market outlook – from an outrightly bullish market outlook to moderately bullish market outlook. Reading through the last 5 chapters you must have realised that most professional options traders prefer initiating a spread strategy versus taking on naked option positions. No doubt, spreads tend to shrink the overall profitability, but at the same time spreads give you a greater visibility on risk. Professional traders value ‘risk visibility’ more than the profits. In simple words, it’s a much better deal to take on smaller profits as long as you know what would be your maximum loss under worst case scenarios.

Another interesting aspect of spreads is that invariably there is some sort of financing involved, wherein the purchase of an option is funded by the sale of another option. In fact, financing is one of the key aspects that differentiate a spread versus a normal naked directional position. Over the next few chapters we will discuss strategies which you can deploy when your outlook ranges from moderately bearish to out rightly bearish. The composition of these strategies is similar to the bullish strategies that we discussed earlier in the module.

The first bearish strategy we will look into is the Bear Put Spread, which as you may have guessed is the equivalent of the Bull Call Spread.


7.2 – Strategy notes

Similar to the Bull Call Spread, the Bear Put Spread is quite easy to implement. One would implement a bear put spread when the market outlook is moderately bearish, i.e you expect the market to go down in the near term while at the same time you don’t expect it to go down much. If I were to quantify ‘moderately bearish’, a 4-5% correction would be apt. By invoking a bear put spread one would make a modest gain if the markets correct (go down) as expected but on the other hand if the markets were to go up, the trader will end up with a limited loss.

A conservative trader (read as risk averse trader) would implement Bear Put Spread strategy by simultaneously –

  1. Buying an In the money Put option
  2. Selling an Out of the Money Put option

There is no compulsion that the Bear Put Spread has to be created with an ITM and OTM option. The Bear Put spread can be created employing any two put options. The choice of strike depends on the aggressiveness of the trade. However do note that both the options should belong to the same expiry and same underlying. To understand the implementation better, let’s take up an example and see how the strategy behaves under different scenarios.

As of today Nifty is at 7485, this would make 7600 PE In the money and 7400 PE Out of the money. The ‘Bear Put Spread’ would require one to sell 7400 PE, the premium received from the sale would partially finance the purchase of the 7600 PE. The premium paid (PP) for the 7600 PE is Rs.165, and the premium received (PR) for the 7400 PE is Rs.73/-. The net debit for this transaction would be –

73 – 165

= -92

To understand how the payoff of the strategy works under different expiry circumstances, we need to consider different scenarios. Please do bear in mind the payoff is upon expiry, which means to say that the trader is expected to hold these positions till expiry.

Scenario 1 – Market expires at 7800 (above long put option i.e 7600)

This is a case where the market has gone up as opposed to the expectation that it would go down. At 7800 both the put option i.e 7600 and 7400 would not have any intrinsic value, hence they would expire worthless.

  • The premium paid for 7600 PE i.e Rs.165 would go to 0, hence we retain nothing
  • The premium received for 7400 PE i.e Rs.73 would be retained entirely
  • Hence at 7800, we would lose Rs.165 on one hand but this would be partially offset by the premium received i.e Rs.73
  • The overall loss would be -165 + 73 = -92

Do note the ‘-ve’ sign associated with 165 indicates that this is a money outflow from the account, and the ‘+ve’ sign associated with 73 indicates that the money is received into the account.

Also, the net loss of 92 is equivalent to the net debit of the strategy.

Scenario 2 – Market expired at 7600 (at long put option)

In this scenario we assume the market expires at 7600, where we have purchased a Put option. But then, at 7600 both 7600 and 7400 PE would expire worthless (similar to scenario 1) resulting in a loss of -92.

Scenario 3 – Market expires at 7508 (breakeven)

7508 is half way through 7600 and 7400, and as you may have guessed I’ve picked 7508 specifically to showcase that the strategy neither makes money nor loses any money at this specific point.

  • The 7600 PE would have an intrinsic value equivalent to Max [7600 -7508, 0], which is 92.
  • Since we have paid Rs.165 as premium for the 7600 PE, some of the premium paid would be recovered. That would be 165 – 92 = 73, which means to say the net loss on 7600 PE at this stage would be Rs.73 and not Rs.165
  • The 7400 PE would expire worthless, hence we get to retain the entire premium of Rs.73
  • So on hand we make 73 (7400 PE) and on the other we lose 73 (7600 PE) resulting in a no loss no profit situation

Hence, 7508 would be the breakeven point for this strategy.

Scenario 4 – Market expires at 7400 (at short put option)

This is an interesting level, do recall when we initiated the position the spot was at 7485, and now the market has gone down as expected. At this point both the options would have interesting outcomes.

  • The 7600 PE would have an intrinsic value equivalent to Max [7600 -7400, 0], which is 200
  • We have paid a premium of Rs.165, which would be recovered from the intrinsic value of Rs.200, hence after compensating for the premium paid one would retain Rs.35/-
  • The 7400 PE would expire worthless, hence the entire premium of Rs.73 would be retained
  • The net profit at this level would be 35+73 = 108

The net payoff from the strategy is in line with the overall expectation from the strategy i.e the trader gets to make a modest profit when the market goes down.

Scenario 5 – Market expires at 7200 (below the short put option)

This is again an interesting level as both the options would have an intrinsic value. Lets figure out how the numbers add up –

  • The 7600 PE would have an intrinsic value equivalent to Max [7600 -7200, 0], which is 400
  • We have paid a premium of Rs.165, which would be recovered from the intrinsic value of Rs.400, hence after compensating for the premium paid one would retain Rs.235/-
  • The 7400 PE would have an intrinsic value equivalent to Max [7400 -7200, 0], which is 200
  • We received a premium of Rs.73, however we will have to let go of the premium and bear a loss over and above 73. This would be 200 -73 = 127
  • On one hand we make a profit of Rs.235 and on the other we lose 127, therefore the net payoff of the strategy would be 235 – 127 = 108.

Summarizing all the scenarios (I’ve put up the payoff values directly after considering the premiums)

Market Expiry Long Put (7600)_IV Short Put (7400)_IV Net payoff
7800 0 0 -92
7600 0 0 -92
7508 92 0 0
7200 400 200 +108

Do note, the net payoff from the strategy is in line with the overall expectation from the strategy i.e the trader gets to make a modest profit when the market goes down while at the same time the losses are capped in case the market goes up.

Have a look at the table below –

Image 1_payoff
The table below shows the strategy payoff at different expiry levels. The losses are capped to 92 (when markets go up) and the profits are capped to 108 (when markets go down).

7.3 – Strategy critical levels

From the above discussed scenarios we can generalize a few things –

  1. Strategy makes a loss if the spot moves above the breakeven point, and makes a profit below the breakeven point
  2. Both the profits and loss are capped
  3. Spread is difference between the two strike prices.
    1. In this example spread would be 7600 – 7400 = 200
  4. Net Debit = Premium Paid – Premium Received
    1. 165 – 73 = 92
  5. Breakeven = Higher strike – Net Debit
    1. 7600 – 92 = 7508
  6. Max profit = Spread – Net Debit
    1. 200 – 92 = 108
  7. Max Loss = Net Debit
    1. 92

You can note all these critical points in the strategy payoff diagram –

Image 2_graph

7.4 – Quick note on Delta

This is something I missed talking about in the earlier chapters, but its better late than never :-). Whenever you implement an options strategy always add up the deltas. I used the B&S calculator to calculate the deltas.

The delta of 7600 PE is -0.618

Image 3_delta 1

The delta of 7400 PE is – 0.342

Image 4_delta 2

The negative sign indicates that the put option premium will go down if the markets go up, and premium gains value if the markets go down. But do note, we have written the 7400 PE, hence the Delta would be


+ 0.342

Now, since deltas are additive in nature we can add up the deltas to give the combined delta of the position. In this case it would be –

-0.618 + (+0.342)

= – 0.276

This means the strategy has an overall delta of 0.276 and the ‘–ve’ indicates that the premiums will go up if the markets go down. Similarly you can add up the deltas of other strategies we’ve discussed earlier – Bull Call Spread, Call Ratio Back spread etc and you will realize they all have a positive delta indicating that the strategy is bullish.

When you have more than 2 option legs it gets really difficult to estimate the overall bias of the strategy (whether the strategy is bullish or bearish), in such cases you can quickly add up the deltas to know the bias. Further, if in case the deltas add to zero, then it means that the strategy is not really biased to any direction. Such strategies are called ‘Delta Neutral’. We will eventually discuss these strategies at a later point in this module.

Also, you may be interested to know that while the delta neutral strategies are immune to market’s directional move, they react to changes in volatility and time, hence these are also sometime called “Volatility based strategies”.

7.5 – Strike selection and effect of volatility

The strike selection for a bear put spread is very similar to the strike selection methodology of a bull call spread. I hope you are familiar with the ‘1st half of the series’ and ‘2nd half of the series’ methodology. If not I’d suggest you to kindly read through section 2.3.

Have a look at the graph below –

Image 5_start of the series

If we are in the first half of the series (ample time to expiry) and we expect the market to go down by about 4% from present levels, choose the following strikes to create the spread

Expect 4% move to happen within Higher strike Lower strike Refer graph on
5 days Far OTM Far OTM Top left
15 days ATM Slightly OTM Top right
25 days ATM OTM Bottom left
At expiry ATM OTM Bottom right

Now assuming we are in the 2nd half of the series, selecting the following strikes to create the spread would make sense –

Image 6_2nd half of series

Expect 4% move to happen within Higher strike Lower strike Refer graph on
Same day (even specific) OTM OTM Top left
5 days ITM/OTM OTM Top right
10 days ITM/OTM OTM Bottom left
At expiry ITM/OTM OTM Bottom right

I hope you will find the above two tables useful while selecting the strikes for the bear put spread.

We will now shift our focus on the effect of volatility on the bear put spread. Have a look at the following image –

Image 7_volatility effect

The graph above explains how the premium varies with respect to variation in volatility and time.

  • The blue line suggests that the cost of the strategy does not vary much with the increase in volatility when there is ample time to expiry (30 days)
  • The green line suggests that the cost of the strategy varies moderately with the increase in volatility when there is about 15 days to expiry
  • The red line suggests that the cost of the strategy varies significantly with the increase in volatility when there is about 5 days to expiry

From these graphs it is clear that one should not really be worried about the changes in the volatility when there is ample time to expiry. However one should have a view on volatility between midway and expiry of the series. It is advisable to take the bear put spread only when the volatility is expected to increase, alternatively if you expect the volatility to decrease, its best to avoid the strategy.

Key takeaways from this chapter

  1. Spread offers visibility on risk but at the same time shrinks the reward
  2. When you create a spread, the proceeds from the sale of an option offsets the purchase of an option
  3. Bear put spread is best invoked when you are moderately bearish on the markets
  4. Both the profits and losses are capped
  5. Classic bear put spread involves simultaneously purchasing ITM put options and selling OTM put options
  6. Bear put spread usually results in a net debit
  7. Net Debit = Premium Paid – Premium Received
  8. Breakeven = Higher strike – Net Debit
  9. Max profit = Spread – Net Debit
  10. Max Loss = Net Debit
  11. Select strikes based on the time to expiry
  12. Implement the strategy only when you expect the volatility to increase (especially in the 2nd half of the series)


Download Bear Put Spread Excel Sheet


  1. Avinash Punjabi says:

    Hi Karthik,
    Good to read about the Bear Put spread.
    Sub: Your example of adding up Deltas in the Bear Put Spread ie Delta of 7600PE (-0.618) + (-o.342) = (-0.92).
    I feel we should add Deltas when we are long both the put strikes because when market moves down, our change in position will be in sync with the total DELTA value ie(-0.92)
    But when we are setting up a spread we are actually long 7600PE(-0.618) Delta and short 7400PE(-0.342) Delta. So strictly with reference to DELTA, Our total change in position will be the difference of the two DELTAS ie (-0.276), because one position gains and the other one loses.
    Our profit/change in premium with reference to DELTA will actually be ,Change in premium= ( points change in underlying x DELTA -0.276).
    Your clarification will be very helpful.

    • Karthik Rangappa says:

      Hey, I think I’ve made silly mistake. You could be right…let me recheck and updates the content. Thanks for pointing this.

  2. suresh says:

    How many days will take to complete this Option Strategy Module?
    Really you are doing very great job, we are very great full to you for giving such a precious information.
    we got a lot of knowledge from this Modules, now we are getting confident in Trading and Investing in Stock market
    Thank you so much

    • Karthik Rangappa says:

      Suresh, there are at least another 7 – 8 chapters in this module. Will try my best to wind up as soon as possible.

      Good luck to you, stay profitable.

  3. keshav says:

    Sir, u r not yet discussed about putcall ratio..

  4. Avinash Punjabi says:

    Hi Karthik,
    Good to know that my understanding of relative DELTA value was right and you were kind enough to accept it and make the correction in the tutorial.
    All this knowledge and understanding of options I have gained only from YOU , but still I am not able to garner the courage to trade options/spreads , maybe fear of losing money as in the past when I had no understanding of options and lost money trading them.

  5. Chandrakant says:

    I am little confuse that when to form option strategies specially when starting of the month. and also guide we don’t have to form strategies in 3rd or 4th week of the month.

    • Karthik Rangappa says:

      The theta graphs should help you with this. If you have any specific doubt, I can try to answer it for you.

  6. Vivekanand says:

    Is there a plan to incorporate buy/sell of option strategies from Zerodha platform (Pi/Kite)? Something similar to thinkorswim where the strategies can be executed in a single go.

  7. garg10may says:

    I was today trying to place the below order, for 20 lots
    long 7800 Nifty Jun PE
    short 7900 Nifty Jun PE
    In above the maximum theoretical loss can’t exceed 1.5L, but when I try to place the order from kite my sell order gets rejected with message that margin required is 7.5L+, why this is so?

    • Karthik Rangappa says:

      That’s because margins are blocked when you sell options, the margins are similar to futures margin.

      • garg10may says:

        Then how do I execute the various strategies you are teaching. And one thing I didn’t get if I only have a sell order then margin should be blocked but for this order my loss can’t exceed 1.5L then why so heavy margins? How can I bring them down.

  8. Isaac Maria says:

    Hello Sir,
    1. If I intend to trade options before expiry I need to consider all the geeks
    2. If I intend wait till expiry I need not consider other geeks only choosing the right strike is important

    Am I right?

  9. shanmukha says:

    Hi Karthik,
    Thanks for your Option Strategies. Can you please add +50 to the Nifty strikes in the excel and update in the modules.
    I think will get more clearer RRR in 50’s rather difference of 100 in strikes.

  10. Surya says:

    Thank you

  11. Promit Banerjee says:

    Hi Karthik,
    I have a problem in understanding the volatility curve graph.
    It says that in each scenario the Strategy Cost increases with an increase in Volatility.
    So this is a Bear Put Spread happening on a net debit in this case -92.
    So what is basically increasing with the increase in Volatility.??
    And if it is the net debit we are talking about here, then the Y axis should be represented by negative value…
    And how can the net debit increasing be beneficial for the spread.

    Facing the same problem with all the Volatility graphs in this module.
    Kindly explain. Think I am missing some thing crucial here..

    • Karthik Rangappa says:

      With increase in volatility, option premiums increase….and with the increase in premiums, the cost of writing options also increases. So if your strategy involves a net debit, then with the increased premium, the debit will be higher. In other words the cost of strategy is higher.

      So when you traverse right side on on the y-axis, the cost increases and likewise on the left side it reduces.

  12. Javed says:

    Hi Karthik,
    While trading stock option where to check the volatility of stock and how to decide if its low or high? based or that we can decide where to buy or sell option.
    Is it the case that for stock also we need to check the INDIA VIX ?


    • Karthik Rangappa says:

      You can compare its current volatility with its historical vol to estimate if its high or low. Yes, India Vix helps while trading Nifty.

      • Javed says:

        Can you please let me know where to check stock option current and historical volatility ?

        • Karthik Rangappa says:

          For current implied volatility, check on the option chain on NSE website or you can even use an option B&S calculator. Historical vol has to be calculated.

          • Javed says:

            Sorry to bother you again, Just little confuse here.
            I checked your option module and you explain the method to calculating daily and historical volatility. but i could not find the calculation for historical Implied Volatility and that is what deciding factor for shorting or buying the option right ?
            and the greek calculater shows VEGA and on NSE daily implied Volatility are same? means VEGA Is the Implied Volatility ?Hope you get my confusion related with the volatility 🙂


          • Karthik Rangappa says:

            I’m not too sure about the techniques of calculating historical IVs. Hence I decided to keep away from it. However, for all practical reasons, I think its good enough if you compare today’s IV versus historical volatility. B&S calculator is also used to calculate the IV of the option. You enter the price and get the IV. Check this post –

  13. HARESH says:

    Since last two month, I am watching Nifty call and put option. I did trading on Nifty PE and CE and got the experience by Zerodha trading account.
    I have one doubt about Put(PE) Sell. Please see the following example and try to give my answer.
    Ex. Second week of month NIFTY JUN 9500 PE premium is around 40. If I buy this NIFTY JUN 9500 PE have to pay 75*40= 3000 Rs premium. Which will be day by day reduce or Zero on expiry.( If it increase price I can book the profit.)
    Now my question is here , If I sell this NIFTY JUN 9500 PE (40) have to pay 46000 premium, which include span + exposure margin + option premium. Now, I want to buy this PE just one week ahead of the expiry and price of this 9500 PE is around 15.
    1) Let me know can I buy this put that time and book the profit ?
    2). If Yes then how much I can earned profit ?
    3). Is there any affect on SPan and exposure margin ?
    4). How much safe this option ?

    Hope you will clarify.


  14. Vishal says:

    How to calculate time to target objectively?

  15. Arun says:

    Hi karthik,
    what is meant by strategy cost?

    • Karthik Rangappa says:

      Here is a strategy: Buy Nifty ATM call at 102 and buy Nifty ATM Put at 90. The cost of executing this strategy is 102 + 90 = 192, which is nothing but the strategy cost.

  16. Satya Koneti says:

    Hi Karthik,
    Assume my view is bearish.
    If we trade on “Bear put spread” strategy and market goes against our view, Can we enter into “Bull call Spread” to cover the losses?
    The idea is only to cover the losses not to make any profit when market goes against our view? Is it possible to come out with out losses?

    Please confirm.


    • Karthik Rangappa says:

      Satya, deploying a bull call spread, just to hedge a position can be a costly affair. Instead of this, you can add one more lot to the bullish position and ride on the wave.

      • Ravi says:


        Can you please explain which option to add one more lot of ? What would be the bullish position in this spread ?


        • Karthik Rangappa says:

          Ravi, sorry, didn’t quite get that query. Can you please elaborate?

          • Ravi says:


            Thanks for your quick reply, sorry for not being clear in earlier query.

            In the above reply you had said
            “Instead of this, you can add one more lot to the bullish position and ride on the wave.”
            I wanted to ask which is bullish position referred to here..


          • Karthik Rangappa says:

            To sell OTM Put position.

  17. Nikil says:

    Hey Karthik
    There is a trade in Adanipower 15 CE- 4.1 and 17.5 CE- 1.45.
    credit received is more than difference in strike prices. NO risk trade.
    what can go wrong? liquidity?

  18. ASHWIN says:


    Today OCT17 Bnifty 25200PE closed at Rs 3 even though the spot was 25188.60. Ideally it should be around 11.40/-
    Can you please explain why this difference?

  19. Hari Narayanan says:

    Dear Sir,

    I bought a 10900PE Buy for Premium 170 and 10700PE Sell for Premium 105, while nifty was at 10880 on 31st Dec for the Jan options.
    Hope this qualifies a Bear Put Spread with following characteristics:
    Spread=200; Net Debit=65; Breakeven=10900-65=10835; Max Loss=65 @ 10900 and above; Max [email protected] and below.
    However, the change in premium values are never confirming this (@ Nifty 10715, premium values are 252 & 160 respectively).
    Also, should I hold this position till the expiry (31Jan) in order to square off and realize the profit/loss?
    Please revert.

    Best Regards,
    Hari Narayanan

  20. Abudhar al Hassan says:

    Would appreciate your opinion on the following:
    Let’s suppose Nifty spot is @ 11000. I am ‘moderately bearish’ and feel that Nifty would touch 10800 within a week. At the same time, I am sure it would stay above 10500 for let’s say at least the whole of next month. Now my intention is to profit purely from the premium rise so I go ahead and buy the current month’s weekly PUT option i.e. NIFTY 21st FEB 11000 PE for Rs. 100/-. Clearly, I would be risking 100X75 = Rs. 7500/-, which would be my max. loss. I intend to sell the PE 11000 if the spot goes below 11000 and touches 10900 or 10800.
    However, 7500/- is beyond my risk limit and I don’t want to put up a stop loss fearing the volatility we see in weekly options before expiry. So…
    1) What if I short NIFTY 28th MARCH 10500 PE @ Rs. 90/- and collect a premium of 90X75=6750/- so as to partially finance the FEB weekly PE that I bought above and thereby bring my risk down to 7500-6750 = 750/- ?
    2) Assuming the trade goes my way and the spot touches 10800 in FEB, will the premium of the 10500 PE of MARCH be affected hugely?
    In other words, I am basically asking whether we can buy an ITM option of current month and sell a deep OTM option of a far month and benefit from the premium rise? (I do not intend to hold any of the options till expiry)
    ~Abudhar al Hassan.

    • Karthik Rangappa says:

      This is perfectly valid, Abhudhar as this is a spread and should protect your downside (as well as the upside). The tricky bit is with the expires. Why don’t you do both these on monthly expiry?

      • Abudhar al Hassan says:

        If I go for same month expiry options…and the price goes down as I expect it to…then the premium for both the bought and sold options would increase at similar pace…so the gains from the bought option would be offset by the losses of the shorted option.
        If I buy a very near weekly expiry ATM option and short a deep OTM FAR MONTH option, and if the price moves down as I expect it to, then the premium of the near weekly option would rise at a far more rapid pace than that of the shorted far month OTM option..right? And thus make some profit from the premium differences. Remember I mentioned I dont intend to hold the options till expiry..want to play with the premiums only.
        Do you think this makes sense? Or am I overlooking something here? Please advice.

        P.S.: Not a big deal but my name is spelled ‘Abudhar’ and not ‘Abhudhar’ 😀 🙂

        ~ Abudhar al Hassan.

        • Karthik Rangappa says:

          the premium for both the bought and sold options would increase at similar pace —-> this is not true. The pace at which the premium would increase depends upon the moneyness and expiry of the option.

          Apologies for misspelling your name, I’ll remember it for the next time 🙂

      • Abudhar al Hassan says:

        Another reason to short FAR month OTM option is that they would be relatively priced higher. So shorting and collecting their premiums would bring down the cost of the weekly option that I would buy by a great deal.
        Again I could be wrong and I an pretty sure I am missing something here…
        ~ Abudhar al Hassan.

  21. Anitesh Singh says:

    Hi Kartik.. I am bearish on Ashok Leyland.. Right now it is trading at Rs.90 and I think by the time of expiry it will be around Rs.80. Since Expiry is reasonably far.. So, as per bear put spread, I purchased one lot ATM option @ 87.5pe and sold one lot deep OTM option @ 80pe.. As per sensibull, it is showing maximum loss of Rs.6200 if it goes against my strategy and I hold it expiry and maximum profit of Rs.23,363..
    I have 2 doubts..
    1- Is there any possibility that my maximum loss can be more than Rs.6200 if position goes against me?
    2- What do you think would be better alternative than this strategy?

    • Karthik Rangappa says:

      1) No, since this is a spread, the loss is restricted to 6200 (provided the math you’ve done is correct)
      2) RRR is good so worth the bet. But if you are sure about the outcome, why not buy a slightly OTM PE?

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