Bear Spread

A bear spread is an options trading strategy. It is used by the traders who seek profit when the price of the underlying security declines. The strategy involves simultaneous purchase and sale of options. Both puts and calls can be used to create such spread.
 

Bear Call Spread

A bear call spread can be constructed by buying call options with a higher strike and simultaneously selling the same number of call options with a lower strike on the same underlying security, expiring on the same date.

The figure shows the payoff for bear call spread.

Bear Put Spread
 

A bear put spread can be implemented by buying put options with a higher strike and simultaneously selling the same number of put options with a lower strike on the same underlying security, expiring on the same date.

Suppose XYZ stock is trading at $43 and the option contract lot size is 100. A trader enters a bear put spread by buying put options at $45 for $300 and selling put options at a strike price of $40 for $100 at the same time, resulting in a net debit of $200 for entering this position.

Suppose the price of the stock drops to $39 at expiration. Both puts expire in-the-money with the long put having an intrinsic value of $600 and short put having an intrinsic value of $100. This means the net spread is now worth $500 at expiration and the net profit is $300. This is also his maximum profit.

Suppose the stock rises to $46, both options expire worthless, and the options trader loses the entire $200 to enter the trade. This is also his maximum loss.