Bull Put Spread - Buy lower strike Put, Sell higher strike Put
Strategies...
- Buy lower strike put
- Sell same number of higher strike puts with the same expiration date.
- Ensure trend is upward
- Preferably with one month or less to expiration
VeriFone Systems Inc (NYSE:PAY) is trading at $38 on May 26, 2012.
- Buy the Jun 2012 $33 put option for $0.35.
- Sell the Jun 2012 $37 put option for $1.20.
 |
| Bull Put Spread |
Why Buy Jun $33 Put? You have right to sell the stock at $33 if stock price fall.
Why Sell Jun $37 Put? Capped downside risk. Jun $37 Put will not be exercised if price fall lower than $37.
How does Bull Put Spread work?
Stock price rise to $40.00...(or higher)
- Buy the Jun 2012 $33 Put = Out-of-the-money, $0
- Sell the Jun 2012 $37 Put = Put not exercise, premium gain=$1.20
- Net premium gain: $ 1.20 - $0.35 = $0.85
- Profit: $0.85
Stock price at $36.15...
- Buy the Jun 2012 $33 Put = at-the-money, $0
- Sell the Jun 2012 $37 Put = Put exercised, loss $0.85
- Net premium gain: $ 1.20 - $0.35 = $0.85
- Profit : $0
Stock Price fall to $30...
- Buy the Jun 2012 $33 Put = In-the-money, gain $3
- Sell the Jun 2012 $37 Put = Put exercised, loss $7
- Net premium gain: $ 1.20 - $0.35 = $0.85
- Profit : $3-$7+$0.85= -$3.15
 |
| Bull Put Spread |
Advantages...
- Short-term immediate income, net premium = $0.85,
- Capped downside protection. (No matter how further price goes down, maximum loss in Buying and Selling Put is locked to the difference in strikes $37-$33=$4)
Disadvantage...
- Capped upside if the stock rises.(No matter how high stock price rise, you maximum profit cap to net premium gain=$0.85)
Maximum Profit: $1.20-$0.35=$0.85
(premium received - premium paid = net premium gain)
Maximum Loss: $37-$33+$0.85=$3.15
(Different in strike + net premium gain)
Breakeven: $37-$0.85=$36.15
(Higher strike - net premium gain)
No comments:
Post a Comment