Weekly Strategy Discussion

The Weekly Strategy Discussion is designed to assist individuals in learning how options work and in understanding various options strategies. Options involve risk and are not suitable for all investors. The strategies discussed are for educational and illustrative purposes only, and should not be construed as an endorsement, recommendation or solicitation to buy or sell securities. Commissions, taxes and transaction costs are not included. Please contact a tax advisor for the tax implications involved in these strategies.

Bull Put Spread

Example:                 XYZ stock is trading at $39 

Outlook:                  You are neutral to bullish on XYZ stock.

Possible strategy:     Bull Put Spread

                              Sell 1 XYZ 40 strike Put at $2.50

                              Buy 1 XYZ 35 strike Put at $1.00

                                                 Net Credit    $1.50

  

*All values shown are at the time of expiration. Commissions and other trading fees not included.

Stock

Short 40 Put

Long 35 Put

Net Profit (Loss)

45

$2.50

($1.00)

$1.50

40

$2.50

($1.00)

$1.50

38.5

$1.00

($1.00)

$0

35

($2.50)

($1.00)

($3.50)

30

($7.50)

$4.00

($3.50)

 

At Expiration:

  • Maximum Profit = Net Credit
  • Maximum Profit = $150
  • Breakeven = Higher Strike Price - Net Credit
  • Breakeven = 40 - $1.50 = $38.50
  • Maximum Loss = Difference in Strike Prices - Net Credit
  • Maximum Loss = 40 - 35 -1.50 = $3.50 ($350)

In Summary: Maximum loss is limited and your profit potential is limited to the net credit received for the spread.  Have a timeframe in mind to realize your forecast.