When your feeling on a stock is generally negative, bear spreads are nice low risk, low reward strategies. One of the easiest way to create a bear spread is by using put options at or near the current market price of the stock.

Like bear call spreads, bear put spreads profit when the price of the underlying stock decreases. Bear put spreads are typically created by buying at-the-money puts and selling out-of-the-money puts.

Example

Using Philip Morris (Nasdaq: MO), we can create a bear put spread using in-the-money options. With MO Trading at $56.78 in May, you might buy ten of the JUL 60 puts and sell ten JUL 55 puts.

In this case, the maximum profit would be the difference between the strike prices less the $3,000 it cost to put on the position. In this case, the maximum profit works out to $2,000 ((60 - 55 x 1,000) - $3,000). In contrast, the maximum loss would be limited to the $3,000 spent initiating the trade. Once again, this maximum loss is the amount used to calculate the ROI.

If you like the idea behind the bear put spread, be sure to check out bull call spreads and bear call spreads. These can be comparable strategies depending on your objectives.