Anticipations
An upward move in the underlying asset, but the extent of the move is uncertain.
Characteristics
Limited profit / limited loss.
Max profit - limited to the net credit received
Max loss - difference between the strike prices less net credit received
Creating
Buy a put option and sell a put option with a higher strike.
Example
Security(IBM) price - $100
Long 1 IBM 100 Put - $5.5
Short 1 IBM 110 Put - $12
Max profit = $(12 - 5.5) * 100 = $650
Max loss = $[(110 - 100) - (12 - 5.5)] * 100 = $350
Option Position at Expiration
Comments
If a rise in implied
volatility is expected : buy ATM put / sell ITM put
If a fall in implied
volatility is expected: buy OTM put / sell ATM put
|
