A bear put spread is a bearish options strategy that involves buying a put option at a higher strike price and simultaneously selling a put option at a lower strike price, both with the same expiration date. The strategy profits when the underlying asset falls below the higher strike price, and maximum profit is achieved when the price drops to or below the lower strike at expiration.

The net debit is the cost of entering the spread, calculated as the premium paid for the higher strike put minus the premium received for the lower strike put. This net debit represents your maximum loss on the trade, which occurs if the underlying price stays above the higher strike at expiration and both options expire worthless or out of the money.

The maximum profit is capped at the difference between the two strike prices minus the net debit, multiplied by 100 shares per contract. The breakeven point is the higher strike price minus the net debit. This strategy is useful when you expect a moderate decline in the underlying asset and want to limit both your risk and your capital outlay compared to buying a standalone put.

Formulas

Net Debit = Premium Paid - Premium Received

Max Profit = (Higher Strike - Lower Strike - Net Debit) x 100 x Contracts

Max Loss = Net Debit x 100 x Contracts

Breakeven = Higher Strike - Net Debit

Example

You buy a $110 put for $6.00 and sell a $100 put for $2.50 on 1 contract. The net debit is $6.00 - $2.50 = $3.50. Max profit is ($110 - $100 - $3.50) x 100 = $650. Max loss is $3.50 x 100 = $350. Breakeven is $110 - $3.50 = $106.50. The risk-reward ratio is 1:1.86.