Put Bear Spread

Components

Short one put option at a lower strike price and long one put option at a higher strike price.

Risk / Reward

Maximum Loss: Limited to the net amount paid for the spread. I.e. the premium paid for the long position less the premium received for the short position.

Maximum Gain: Limited to the difference between the two strike prices minus the net paid for the position.

Characteristics

When to use: When you are bearish on market direction.

A Put Bear Spread has the same payoff as the Call Bear Spread as both strategies hope for a decrease in market prices. The choice as to which spread to use, however, comes down to risk/reward.

A good tip is to compare the market prices of both spreads to determine which has the better payoff for you.