Out-of-the-Money Bear Put Spread
Example: The Cboe Volatility Index (VIX) is at 48.00 on weaker stock markets. VIX was trading under 40 less than 1 week ago.
Outlook: You expect VIX to fall on steadier markets and are looking for a low cost trade.
Possible strategy: Out-of-the-money Bear Put Spread
Buy 1 February 45 put at 3.60
Sell 1 February 40 put at 1.60
Net cost of 2.00 or $200.00.
*All values shown are at the time of expiration. Commissions and other trading fees not included.
- *Unchanged:Loss of $200.00
- **Maximum Loss:$200.00 if VIX > or = 45 (-6.25%)0
- ***Break-even:VIX at 43.00 (-10.42%)
- ****Maximum Gain: $300.00 if VIX < or = 40 (-16.67%)
In Summary: Purchase an out-of-the-money put spread for a cost of $200.00 (maximum risk) and with a maximum profit potential of $300 as a low cost trade to benefit from lower market volatility. Risk / reward ratio of 1 to 1.5