Put Spreads

OptionsAnnex.com

In the first article on Options Spreads, we discussed the Advantages of Debit and Credit Spreads ; the second discussed Call Vertical Spreads ; both Debit and Credit. In this article we’ll discuss the Put Vertical Spreads; both Debit and Credit.

There are two Put vertical spreads: Put Debit spread (Bear Put), and Put Credit spread (Bull Put).

NOTE: click on the pictures to enlarge.

Bear Put Spread

This spread is comprised of an NTM long put (closer to ATM) and an OTM short put in the same option chain. NTM means near-the-money.The Bear Put spread has the following characteristics.

o debit spread (you pay for this position)

o bearish expectation (expect the underlying to go down)

o delta is negative

o vega is positive (you want increased volatility)

o theta is negative (lose money to time decay)

In the example (see pictures above) this spread is

o Long 1625 (green box), Short 1615 (red box)

o the cost is $3.40 (or $340 per contract; white box)

o this spread is $10 wide (1625 — 1615)

o max gain $660; max loss $340

Capital Requirement is $340 (max loss)

o vega is negative (you want decreased volatility)

o theta is positive (make money from time decay)

In the example (see pictures above), this spread is

o Short 1630 (red box); Long 1620 (green box)

o the premium is $3.80 (or $380 per contract)

o this spread is $10 wide (1630 — 1620)

o max gain $380; max loss $620

o breakeven is 1626.20 (1630 — 3.80)

Capital Requirement is $620 (max loss)

Primary exit strategy (for a profit): exit when the profit reaches a percent ROC (if 50% ROC, then 0.5 x $620 = $310 is profit target)

Secondary exit (for a losing position): exit at percent ROC (50% loss = -$310; could reverse to a debit spread to reduce the loss.

In the pictures above are the Risk Profiles (at expiration) for the Bear Put and Bull Put, with breakeven points.

In conclusion, we’ve discussed the Bear Put Spread (also known as a Put Debit Spread) and the Bull Put Spread (also known as the Put Credit Spread).

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