a) Market is expected to go down
        b) Limited profit or loss 

Bear spread is used when the market is likely to go down, it can be created in two ways which are given below:
1st Buying a call of higher strike price and selling a call of lower strike price:- When an investor  creates a spread by purchasing a call and selling another call of lower strike price. If the market goes down after the creation of spread, investor makes profits otherwise he loses.

Let us take an example to understand this in detail- an investor takes following positions on 27^th May 2005 when Nifty Spot was Rs.2070.

 

Action	Option type	Strike	Premium	Total investment
Long	Call	2100	24
Short	Call	2050	48.95	-24.95

Here he buys a Nifty call of Strike price Rs.2100 and sells a call of Strike price of Rs.2050 (Lower strike price). For creating this spread he receives a net amount of Rs.24.95 as premium (Rs.24 paid for long position and Rs.48.95 received from short position).

Now, his cash flow at different levels of Nifty closing on 30^th June05 (last Thursday of the following month) are as follows:

Here we find that maximum loss and profit that he can incur are limited, thus it has low level of risk (lesser profits also). If he goes right in predicting the trend then on an investment of Rs.24.95, he can earn Rs.24.95.

2nd Buying a Put of higher strike price and selling a Put of lower strike price:- When an investor  creates a spread by purchasing a Put and selling another Put of lower strike price. If the market goes down after the creation of spread, investor makes profits otherwise he loses.

Let us take an example to understand this in detail- an investor takes following positions on 27^th May 2005 when Nifty Spot was Rs.2070.

Here he buys a Nifty Put of Strike price Rs.2100 and sells a Put of Strike price of Rs.2050 (Lower strike price). For creating this spread he pays a net amount of Rs.25 as premium (Rs.59 paid for long position and Rs.34 received from short position).

Now, his cash flow at different levels of Nifty closing on 30^th June05(last Thursday of the following month) are as follows: