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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.
- 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.
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.
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.