Long Put Spread – A Strategy Overview

• Strategy: Buy put options contract + Sell lower strike put options contract (ratio of 1 to 1) on the same stock.

• Number of legs: 2

• Market Prognosis = Bearish (Down-Market)

• Implied Volatility = Irrelevant but not 100% hedged

• Expiration Month = 60 days or more to expire (beginners).  Flexible for veterans.

• Max Loss = Risk = Limited to premium paid for spread = Premium paid for long leg – premium received for short leg

• Max Profit = Distance between two legs – premium paid for spread

• Upside Breakeven Point = None

• Downside Breakeven Point = Strike price at the time of purchase of the long leg minus (-) premium paid per 1 option spread.

• Margin = None

• Advantage over Short Stock = Significantly Lower Cost + Limited Risk

• Advantage over Long Straight Put = Lower Cost + Shorter path to breakeven

• Disadvantage over Short Stock = Limited time to be right.

Tags: call, derivative, Long Put Spread, options, put, stock

Category: Vertical Spreads