Anticipations
A downward move in the underlying asset, but the extent of the move is uncertain.
Characteristics
Limited profit / limited loss.
Max profit - limited to difference between the strike prices less net debit of the spread.
Max loss - limited to the net debit required to establish the position.
Creating
Sell a put option and
buy a put option with higher strike.
Example
Security(IBM) price - $100
Short 1 IBM 90 Put - $2
Long 1 IBM 100 Put - $5.8
Max profit = $[(100 - 90) - (5.8 - 2)] * 100= $620
Max loss = $(5.8 - 2) * 100 = $380
Option Position at Expiration
Comments
If
a fall in implied volatility is expected: buy ITM put / sell ATM
put.
If a rise in implied
volatility is expected: buy ATM put / sell OTM put.
|
