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The Different Option Strategies
Put Spread
A Put Spread is a bearish trade. It is often used by traders when they expect prices to fall but not so aggressively.
Put Spread
Risk: Limited
Reward: Limited
The Trade: Buy an at the money put option and sell an out of the money put. The profit will come as the share price drops.

ABC Stock trading at £5.00

Buy 1 Sep £5.00 call and sell 1 Jun £4.50 put (see pay-off diagram below)

Options - Put Spread

When to use: You think the stock will go down somewhat or at least is a bit more likely to fall than to rise.
Volatility expectation: Neutral
Profit: Limited to the difference between the two strikes (minus net premium cost). Maximum profit occurs where underlying falls to the level of the lower strike or below.
Loss: Limited to the initial premium paid in establishing the position. Maximum loss occurs where the underlying rises to the level of the higher strike or above.
Breakeven: Reached when the underlying is below the long strike price by the same amount as the net cost of establishing the position.
Time decay: Hurts but not nearly as much as a long put.

Trading ideas and tactics:

  • Be two dimensional - The stock is likely to move down to around £5 but not below £4
  • Consider legging into them, ie maybe put the trade on in ½ size and then look to leg into the other half other
  • Always ask for the strategy quote rather than the 2 options outright
Free Report: How to Learn Spread Betting and Prosper
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Where to get trading help and advice
Which broker to use and why
Simple 2 month training plan to follow
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