Saturday, November 2, 2013

Bear Put Spreads or Debit Spreads

The terms bear and put imply a bias toward a downward price move, so you can assume this strategy involves a spread that goes short the market by using puts. Again, debit spread means that you are paying for the trade and the costs are being debited from your account. Other courses or books may refer to this as a vertical bear put spread.
What is usually involved in this strategy is the purchase of a close-to-the-
money or an in-the-money put and at the same time the sale of a further away
strike price put option of the same expiration date. As mentioned previously,
the close-to- or in-the-money put option may cost a great deal of money as it
is near to the price of the underlying futures contract price, especially if there
is substantial time remaining until the option’s expiration. Traders spread
this cost off by selling or writing a further out of the money put option. When
you sell or write a put, you collect premium or receive a credit in your ac-
count. This credit reduces the cost of the close-to- or in-the-money put.
The profit/ loss profile for this strategy is a limited risk and a lower ex-
pense for the investor as premium costs are reduced by the sale of the higher
strike price call. The profit potential is limited to the level between the two
strike prices minus the premium costs, the commission, and fees. It is the exact
opposite of the bull call spread in the sense of trading market direction.

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