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Bear Put Spread
Also called Long Put Vertical, a Bear Put Spread is the simultaneous purchase of a higher strike price Put and sale of a lower strike price Put, with the same expiration. These are usually done with a debit.
Payoff Diagram:
Direction Assumption: Bearish
Maximum Profit: Limited to the difference between the two strike prices, minus the premium paid. Maximum profit is realized when the underlying moves to or below the Short Put strike price on expiration.
Maximum Loss: Limited to premium paid.
Maximum loss is realized if the spread expires worthless, when the underlying moves to or above the Long Put strike price on expiration.
Breakeven Price: Equal to the Long Put Strike Price - Premium paid
Theta: Passage of Time -> Negative Effect
The net effect of time decay is negative. It will erode the value of the Long Put in a bigger extent than the Short Put.
