This Simple Bear Put Spread Could Be Your Best Defense Against Market Shocks

by Chris Pulver | Dec 9, 2024

With the market hitting all-time highs last week— albeit in tiny, incremental steps — it’s easy to get caught up in the upward momentum.

But prudent traders know that protecting against the downside is just as critical, especially with major economic events on the horizon. Enter the bear put spread — a cost-effective hedging strategy that can offset risks while keeping overall exposure manageable.

Here’s a real-world example of a recent trade I set up on the S&P 500 ETF SPY.

With implied volatility rank very low last week — signaling that premiums are inexpensive — it was an ideal time to build a hedge. I chose a bear put spread targeting the Dec. 31 expiration, buying the $608 put while selling the $590 put.

The debit for this trade was $4.25 per contract, creating a max risk of $425 per contract.

Now let’s talk about potential rewards.

If SPY drops below $590 by expiration, this trade has a maximum profit of $1,800 per contract. That’s a 347% return on risk. Even if the market doesn’t make such a dramatic move, incremental gains are still possible.

For example, a move to $600 could yield around $800 per contract — nearly a 200% gain.

The beauty of this setup lies in its asymmetry. I’m risking just a small fraction of my account to hedge against broader market downside over the next few weeks. If the market continues its melt-up, I lose the small debit amount.

But if we see a pullback — whether driven by next week’s rate decisions, inflation data or some unexpected event — this hedge has the potential to deliver substantial returns.

Why now?

Timing is key, and last week’s low IV made this an opportune moment to buy premium. When volatility spikes — as it did in July and August — options become more expensive, eating into potential profits.

By entering during a period of low IV, I’m positioning myself to benefit from any future volatility increase without overpaying for the trade.

It’s important to remember that hedging isn’t about calling the top or predicting the next crash. It’s about protecting your portfolio from downside risks while maintaining the ability to participate in market gains.

This type of strategy is especially relevant with rate decisions and key inflation data coming up (Wednesday and Thursday of this week). While the market may continue its upward drift, the risk of a 1% to 3% correction is always there.

A well-placed hedge like this can provide peace of mind and a potential profit if the market decides to take a breather.

For traders focused on long-term success, it’s not just about capturing gains — it’s about staying prepared for whatever the market throws at you. The bear put spread is one tool that does just that.

Chris Pulver
Chris Pulver Trading

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