b - Bear Put Spread Profit, Loss, & Breakeven
The following is the profit/loss graph at expiration for the Bear Put Spread in the example given on the previous page.
The breakeven point for the bear put spread is given next:
Breakeven Stock Price = Purchased Put Option Strike Price - Net Premium Paid (Premium Paid - Premium Sold).
To illustrate, the trader purchased the $47.50 strike price put option for $0.44, but also sold the $45.00 strike price for $0.09, for a net premium paid of $0.35. The strike price paid was the $47.50. Therefore, $47.50 - $0.35 = $47.15. The trader will breakeven, excluding commissions/slippage, if the stock reaches $47.15 by expiration.
The max profit for a bear put spread is as follows:
Bear Put Spread Max Profit = Difference between put option strike price purchased and put option strike price sold - Premium Paid for bear put spread.
To illustrate, the put option strike price sold is $45.00 and the put option strike price purchased is $47.50; therefore, the difference is $250 [($47.50 - $45.00) x 100 shares/contract]. The net premium paid for the bull call spread is $35. Consequently, the max profit is $215 ($250 - $35). As a sidenote, this max profit occurs when the stock price is at $45.00 (the lower put strike price) or lower at expiration.
Partial profit is calculated via the following, assuming the stock price is greater than the breakeven price:
Bear Put Spread Partial Profit = Breakeven price - Stock price
For instance, the stock closed at $46.00 at expiration. Hence, the breakeven stock price ($47.15) minus the stock price at expiration ($46.00) would mean the trader profited $115 [($47.15 - $46.00) x 100 shares/contract]
A partial loss occurs between the breakeven stock price and the upper purchased put strike price. The calculation is given next:
Bear Put Spread Partial Loss = Stock price - Breakeven price
For example, a closing stock price at expiration of $47.40 is between the upper put strike price of $47.50 and the breakeven of $47.15 and is therefore going to be a partial loss. When calculated, the loss is $25 [($47.40 - $47.15) x 100 shares/contract].
A complete loss occurs anywhere above the upper purchased put strike price ($47.50) which amounts to the entire premium paid of $35.