10. Long Put Spread

  • Vertical debit spread
    Long an OTM put and short a more OTM put (lower strike price)
  • Initial investment (also max loss) will be [Price of the put] - [Premium recieved for the short put]
  • It has to be at same expiration and same number of contracts
  • The long put cancels all losses of the short put if the price goes lower than the short put strike price
  • This is a bearish position

Advantages

  • Access to expensive underlyings if you don't have enough to only buy the premium of a put

Analysis

  • You buy an OTM put at strike price KL at a premium of PL
  • You sell a more OTM put at a stike price of KS at a premium of PS
  • Your max loss is the premium of the long put - credit for the short put
  • Your breakeven price would be the stike price of the long put - premium of the long put minus the credit recieved of the short put
  • The max profit would be the spread of the long put and the short put stike prices minus the premiums you paid and recieved

long_put_spread2.png

Example

long_put_spread.png

  • Stock at 1600
  • Buy a put at 1505 for 35
  • Sell a put at 1500 for 33
  • Max loss is 2 per share
  • Max profit is 3 per share (difference in stike prices - difference in premiums)
  • Breakeven price is 1503 (1505 - 2 )

Capital required

  • Short 100 shares - $160,000
  • Buy 1 1505 call - $3,500
  • Buy 2100/2105 call spread - $200
Interactive Graph
Table Of Contents
10. Long Put Spread
Advantages
Analysis
Example