Someone who's bullish on SPY might choose a bull spread. A bear, on the other hand, should do just the opposite.
Now, "the opposite" can mean two things here. One option is constructing a __bear spread__ reversing the transactions on the bull spread—that is, buy the call option with the high exercise price, and sell the call option with the low exercise price. What would the premiums force you to do then?
You got it!
Well, no.
Actually, you'd receive the difference.
Buying the call option with the high exercise price won't cost much. You'll receive more by selling the low exercise price call option, and you'll get to keep the difference. Then your maximum profit is just hoping that both expire worthless. What would the underlying price have to do for this to happen?
Not exactly.
If "the middle" is between the exercise prices, this won't work. Only one will expire worthless, and maximum profit won't be obtained.
Right.
This is a bear thing, after all. Call options will expire worthless if the underlying price is below exercise.
No.
If it's high enough, then both options are in the money, and the bull spreads win.
Think of this strategy in terms of put options now. You've got the same prediction: the underlying price will be low enough to earn some money on the spread between two put options with different exercise prices that expire on the same date. Which contract would you want to purchase?
Yes!
Not likely.
You'd want the one with the high exercise price, actually.
These are put options, and you're a bear. So you expect that both will end up in the money, and you're willing to limit your profit by locking in that smaller premium.
To illustrate, go back to SPY. It's trading at USD 268, but you're expecting a fall to USD 260. You might purchase a 270 put at a premium of USD 8 and also sell a 260 put for a premium of USD 2. What's your cash outlay?
Not quite.
That's part of it, but you'll want to transact on that other put option, too.
No.
You're purchasing just one put option contract, not both.
Exactly.
You purchase the 270 put for USD 8, and then sell the 260 put, which gets you back USD 2. Your outlay is the net cost of USD 6.
Then you wait and hope for a price decline. It will have to get down to 264 for you to break even, since that will give you back a value of USD 6 on the 270 put, while the other expires worthless. But if it gets all the way to USD 260 (or beyond), you'll get your maximum profit of USD 4. Here's the general profit form:
$$\displaystyle \Pi = X_2 - X_1 - p_2 + p_1~~ if~~ S_T \leq X_1 $$
$$\displaystyle \Pi = X_2 - S_T - p_2 + p_1 ~~ if~~ X_1 < S_T < X_2 $$
$$\displaystyle \Pi = - p_2 + p_1 ~~ if~~ S_T \geq X_2 $$.
Which one of these cases refers to the maximum loss?
Not so.
The first case is where you'd see maximum _profit_.
Well, no.
The second case is in the middle, where you'd see the breakeven point.
Quite right.
The worst case in this example is losing that invested premium differential of USD 6 if the underlying price is too high. This third case expresses this.
$$\displaystyle \Pi = - p_2 + p_1 ~~ if~~ S_T \geq X_2 $$
$$\displaystyle \Pi = - p_2 + p_1 = -8 + 2 = -6 $$
Here's what the payoff diagram would look like in this case:

A nice, low-risk strategy with profits in a tight range of just USD 10. Or, a tremendous gamble that will give you a 100% loss, a 67% gain, or something in between. However you want to look at it.
In summary:
[[summary]]