To recap, if you feel a stock will be increasing in value, you may put on a bull spread by either buying a vertical call spread (bull call spread) or selling a vertical put spread (bull put spread)
A bear spread, however, is used when, you the investor, feels a stock is likely to trade down.
Remember, 'bearish' means that one's outlook on the future movement of the stock is negative.
To take advantage of this expected downward movement, the investor would put on a bear spread.
This can be done in either of two ways.
First, the investor can do it using puts.
The purchase of a vertical put spread (bear put spread) can be accomplished by purchasing a put with a higher priced strike and selling a put with a lower priced strike.
The second way an investor can construct a bear spread is by using calls, specifically, by selling a vertical call spread (bear call spread).
You do this by selling a call with a lower strike price and purchasing a call with a higher strike price.
So if you think that a stock is likely to decrease in value, you sell a vertical call spread (bear call spread) or purchase a vertical put spread (bear put spread).
Finally, there are two fundamentals that are universal to all vertical spreads.
These fundamentals are critical to understanding the foundation of the vertical spread strategy:
(1) you can determine a vertical spread's maximum value by taking note of the difference between the two strikes and
(2) vertical spreads have intrinsic value.
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