Hi everyone: this is matt from match strats. If you're like me, sometimes you feel absolutely confident that the market or a particular stock will be going down over a certain period of time. One way to profit off a decline is by shorting the stock in question. Shorting is a great tool to know about and utilize, but not all trading platforms or trading accounts allow it.

For example, at the time i'm making this video users are unable to take short positions on the robinhood trading platform. This brings up the question. How can you bet against a stock when shorting isn't an option in this video? I will explain how an option strategy known as a bear put spread, allows you to profit off the decline of a stock. I will cover how this strategy works and then provide a live example of creating the options spread in my own robinhood account to start, you should have a basic understanding of options.

A link to an introductory video is on the top of the screen. Now the construction of this put spread involves two different options. First, you would buy a put option, then you would sell a second put option at a lower strike price relative to the first. These two put options would have the same expiration date to help solidify your understanding.

Let's cover a specific example of a bear put spread. You would start by buying a put option on the stock xyz. Let's say you select the fifty dollar strike price, which has a premium of three dollars and fifty cents. The second part of this spread would require you to sell a put option on xyz.

Let's say you pick a strike price of forty five dollars, which has a premium of one dollar and fifty cents. In this example, since the second option was sold, you would be credited the premium remember. These two options must have the same expiration date in this example. It would cost you a total 200 to create the bear put spread since the net premium is negative.

This strategy can also be called a debit put spread great now. You have bet against xyz by using a put spread. Let's cover the three ways it could play out scenario: one is when the options expire and xyz is at or above 50. This means you pick the wrong direction for xyz and will suffer the maximum possible loss.

I know this would never happen to you. I just figured i should cover it for other traders. In this scenario, both puts would expire out of the money. Since you bought the first option, you would lose the full value of its premium.

Conversely, you would keep the premium of the second option because it was sold. This max loss of 200 would occur if xyz was trading anywhere from 50 to infinity. One advantage of bare put spreads is that the max risk is capped and known when you create the overall position. Next is scenario 2..

The options expire and xyz is at or below forty five dollars. Congratulations, you're, a winner. You pick the correct direction and movement size for xyz, which means you get the maximum possible profit in this situation. Both puts would expire in the money.

You would profit the difference between the two strike prices: minus the cost of the spread. For this example, the strike price difference is 5 and the net cost of the spread is 2.. This means the profit is three dollars per share or three hundred dollars in total. This would be your profit, no matter what value xyz is at as long as it is below forty five dollars.

One way you can increase your potential profit is by widening the difference between your two strike prices. It should be noted that this change would also come with a larger risk. Finally, scenario: three: you were kinda right and kinda wrong. This is what happens when the options expire and xyz is between forty five dollars and fifty dollars at this price point.

The first option would expire in the money and the second option would expire out of the money within this range. The return would span from a loss of two hundred dollars to a profit of three hundred dollars. The break-even price would be computed by taking the higher strike price and subtracting the net premium paid. In this example, you would break even when xyz is at 48 dollars, as xyz goes from 50 dollars to 48 dollars.

Your return would go from negative 200 to zero. Then, as xyz goes from 48 dollars to 45 dollars, your return would go from zero to 300.. Overall, you can see a net short position was created on xyz without directly shorting it as a bonus. The maximum risk was capped, which does not happen in a normal short position.

Now that all the theory is taken care of it's time for a live example on robinhood, i decided to bet against spy to start i selected an expiration day of may 4th. Then i bought a put option at 275 dollars. Finally, i sold a put option. At 273, the net premium was 0.77, which means the position cost me 77 in total to create all of the relevant values are on the screen now, but the main takeaway is that i'm risking seventy seven dollars to potentially make 123.

If the market drops far enough, which means i successfully created a net short position thanks for watching until the end, i hope you enjoyed the video. I would truly appreciate it if you could hit the like button and leave a comment below it really helps with the youtube algorithm. If you are interested in this type of content, subscribe for more best of luck with your trades and as always may the odds be in your favor, you.