This is a past recommendation that demonstrates how a bear put spread is implemented in real life.
Bear Put Spread
Sell 2 WOWB7 Sep 08 2200 Puts @ 55
Buy 2 WOWW3 Sep 08 2550 Puts @ 175
Net Cost = 120 cents
This trade requires no margin requirements.
The ideal result is for the share price to fall below the lower strike price of $22.00.
= Difference between strike prices less net premium received
= 3.50 – 1.20
= 2.30 x 2 contracts
This will occur if the share price is above the bought at expiry
= Net Premium Paid
= 1.20 * 2 contracts
Higher strike minus net premium received
= 25.50 – 1.20
Main Benefits of Strategy
1. Provides leveraged exposure to a decrease in the share price
2. The ideal result is for the share price to fall below the lower strike price of $22.00.
The main risk is for the share price to increase above profitable range ($25.50) and stay there until expiry. If the position expires above the high strike, the position will expire worthless and there will be no exit cost to the trade. If it is below, we will have to exit the trade to avoid being exercised. A change in volatility levels can also have an effect on the profitability before expiry, however the max loss and profit is known at expiry. Contact your adviser for more information.
WOW has a large bearish head and shoulders pattern which has taken about a year and a half to develop. These patterns are usually very reliable and the stock has broken below the neck line this morning. The head and shoulders give a price target of $17.00. We are trading a bear put spread out to September which will return around 200% if the stock falls to $22.00 which is realistic considering the price target for this pattern is $17.00. The September position gives just over 3 months for the stock to fall. Due to the break today, the volatility on the out of the money puts options are very high, so this trade is actually been filled for below fair value which of course is in our favour.
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