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x-man
x-man
Number of messages : 22
Points : 2123
Date of Entry : 2015-07-30
Year : 55

attention Short Put Spread

Thu Jul 30, 2015 9:05 pm
A Short Put Spread works when the trader buys a Put at an out-of-the-money (OTM) strike price A, and sells a Put at a higher strike price B, which might be in-the-money (ITM), out-of–the-money (OTM), or at-the-money (ATM) depending on the trader’s risk and maximum profit preferences. If the trader wishes to sell the Put at an out-ofthe-money (OTM) strike price, it must be higher than the strike price of the purchased Put. By implementing this strategy, the trader minimises his risk as by buying the Put at A he caps his losses if the pair’s price decreases. The downside is that the premium received decreases by the premium paid in order to buy the Put at A.
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When to do it
This strategy works best when the trader thinks that the pair is bullish or neutral and expects low volatility.

The set-up

  • Buy an OTM Put at strike price A (spot -)
  • Sell an ITM, OTM or ATM Put at strike price B (spot - , = or +)
  • At the time of creating this strategy, the pair’s price will be above A and below, at or above B.


Maximum potential profit
The maximum potential profit is the total premium received.

Maximum potential loss
The maximum potential loss is limited to the difference between A and B minus the premium received.

Time impact
In the Short Put Spread, time has no significant effect as any losses suffered by time decay on the purchased
Put are equalised by profits made by time decay on the sold Put.

Best/worst case scenario
The best case scenario is when both options expire worthless and the trader’s premium remains unchanged.
The worst case scenario is limited to the difference between A and B minus the premium received.


Tips
By decreasing the strike price at B, the received premium decreases but the risk decreases as well. Choosing the correct strike price will depend on the expected currency movements and volatility.

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