Previous Test

40.3 Lessons learnt

What have we learnt?

Short put spreads: 

  • A short put spread means you are selling a put spread. When you sell something in normal circumstances, this means you receive money.  The objective of the put spread is that the sold put option provides a higher price than the bought put option. The put option you sell will have a higher strike price than the put option you buy.
  • Selling a put spread is an interesting strategy if you believe the underlying value will go up or move sidewards until the expiry date. The profit of the sold put spread is limited to the difference in premium between the sold put option and the bought put option. The maximum loss on sold put spread is capped at the difference between the strike price of the sold put option and the bought option minus the premium you have received when opening the position.
  • For instance, stock ABC has a price of 10,00 €. You sell the put option 9,00 for 1,50 € and buy the put option 6,00 € for 0,50 €. The premium you received initially is 1,00. If at the expiry date the option the stock has a price > 9,00, both options expire at 0,00, so you reach your maximum profit. If the stock has a price < 6,00 you reach your maximum loss of 9,00 – 6,00 – 1,00 = 2,00.

Long put spreads: 

  • A long or bought put spread implies that you are buying something. In other words, you pay a premium. For the long put spread to be profitable, the underlying value needs to go down.
  • If the underlying value goes down, the put you bought will increase. You reach maximum profit by deducting the strike price of the long put from the short put minus the premium you have initially paid.
  • Stock XYZ has a price in the market of 20,00 €. You decide to buy the put option 18,00 € for 2,00 € and sell the put option 15,00 € for 0,50 €. If At the expiry date the price of the stocks is > 15,00 €, you reach your maximum profit of 18,00 – 15,00 – 1,50 = 1,50. In case the price of the stock goes below 15,00 your maximum loss comes in place of 18,00 – 15,00 – 1,50 = 1,50.
  • It is up to the investor to decide how much premium you want to receive for the put spread and how wide you want to set the strike prices of the bought and sold puts.