Skip to main content

TSX Preferred Share Index(TXPR)
INDEX/TSX

Today's Change
Real-Time Last Update

Market Crash Got You Down? Try These Three Bearish Option Trades

Barchart - Wed Feb 14, 6:00AM CST

With the market taking a turn for the worse yesterday, we’re going to look at how to find bearish options trade ideas using the Bear Put Spread Screener.

A bear put spread is a vertical spread that aims to profit from a stock declining in price. It has a bearish directional bias as hinted in the name. Unlike the bear call spread, it suffers from time decay so traders need to be correct on the direction of the underlying and also the timing.

A bear put spread is created through buying an out-of-the-money put and selling a further out-of-the-money put.

The maximum profit is equal to the distance between the strikes, less the premium paid. The loss is limited to the premium paid.

Let’s take a look at Barchart’s Bear Put Spread Screener for today:

Let’s strengthen the screener by filtering for stocks with a Sell rating.

A screenshot of a graphDescription automatically generated

Some interesting trades here with impressive Max Profit Percentage. Let’s take a look at the first item in the table – a bear put spread on Tesla (TSLA).

TSLA Bear Put Spread Example

Using the April 19 expiry, this trade involves buying the $185 put and selling the $140 put.

The price for the trade is $12.43 which means the trader would pay $1,243 to enter the trade. This is also the maximum loss. The maximum gain be calculated by taking the width between the strikes and subtracting the premium paid:

35 – 12.43 x 100 = $3,257

The breakeven price for the trade is equal to the long put strike, less the premium. In this case, that gives us a breakeven price of $172.57.

Let’s look at the second example using Boeing (BA)

The Barchart Technical Opinion rating is a 100% Sell and ranks in the Top 1% of all short term signal directions.

Long term indicators fully support a continuation of the trend.

Boeing Bear Put Spread Example

The BA example is also using the April 19 expiry and involves buying the $205 strike put and selling the $180 strike put.

The cost of the trade is $737 which is also the maximum loss with the maximum possible gain being $1,763. The maximum gain would occur if BA stock fell below $180 on the expiration date.

The breakeven price is $197.63.

The Barchart Technical Opinion rating is a 56% Sell with a Strengthening short term outlook on maintaining the current direction.

Long term indicators fully support a continuation of the trend.

Let’s look at another example, this time on Morgan Stanley (MS)

Morgan Stanley Bear Put Spread Example

The MS example from the screener is using the April 19 expiry and involves buying the $85 strike put and selling the $75 strike put.

The cost of the trade is $301 which is also the maximum loss with the maximum possible gain being $699. The maximum gain would occur if MS stock fell below $75 on the expiration date.

The Barchart Technical Opinion rating is an 8% Sell with a Weakening short term outlook on maintaining the current direction.

Mitigating Risk

Thankfully, bear put spreads are risk defined trades, so they have some build in risk management. The maximum loss is always limited to the premium paid, so we always know the worst-case scenario.

For each trade consider setting a stop loss of 30% of the max loss.

Please remember that options are risky, and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.


On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

More from The Globe

opinion
This Canadian aerospace stock deserves a place on your watch list
Robert Tattersall