At or Below Lower Strike

SPX Index is at or below lower strike price of 1395 at expiration

Buy 1 SPX 1400/1395 Put Spread at $2.35 Debit

If the SPX exercise settlement value is exactly at the lower strike price of 1395 at expiration, the short 1395 put will be at-the-money and expire with no value.

The long 1400 put will be in-the-money and worth its cash settlement amount:

1400 (put strike price) – 1395 (settlement value) = $5 x $100 = $500

The investor could exercise the long SPX 1400 put to receive its cash settlement amount of $500 and see a profit:

$500 cash settlement amount received at puts’s exercise
- $235 total debit initially paid for put spread
$265 profit

If the SPX exercise settlement value is below the lower strike price of 1395, then the investor could expect assignment on the short 1395 put and have to pay its cash settlement amount. However, the investor would exercise the 1400 put and receive its cash settlement amount, which would always be more than 1395 put’s by $500 (difference in strikes of $5 x $100 multiplier).

As an example, say the exercise settlement value of the SPX index is 1393.

$700 settlement amount received at 1400 put’s exercise ($7 intrinsic value x $100)
- $200 settlement amount paid at 1395 put’s assignment ($2 intrinsic value x $100)
$500 net cash amount received at expiration

Total net profit at expiration, after exercise and assignment, would be:

$500 net cash settlement amount received
- $235 total debit initially paid for spread
$265 profit

This profit of $265 represents a return on an initial investment of $235 total premium paid for the put spread of approximately 112.8% over the 2-month life of the spread.

NOTE: If at any point before expiration the investor feels confident that the long put will expire in-the-money and the short put out-of-the-money, and wants to sell the long put realize a profit or cut a loss, the entire spread should be closed out. Selling only the long put would leave the investor with an uncovered short index put position that has unlimited risk as well a margin requirement, even if the put is sold on the last trading day.

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