A put spread is an option spread strategy that is created when equal number of put options are bought and sold simultaneously. Unlike the put buying strategy in which the profit potential is unlimited, the maximum profit generated by put spreads are limited but they are also, however, relatively cheaper to employ.
Additionally, unlike the outright purchase of put options which can only be employed by bearish investors, put spreads can be constructed to profit from a bull, bear or neutral market.
One of the most basic spread strategies to implement in options trading is the vertical spread. A vertical put spread is created when the short puts and the long puts have the same expiration date but different strike prices.
Vertical put spreads can be bullish or bearish. The vertical bull put spread, or simply bull put spread , is used when the option trader thinks that the underlying security's price will rise before the put options expire.
The vertical bear put spread, or simply bear put spread , is employed by the option trader who believes that the price of the underlying security will fall before the put options expire.
A calendar put spread is created when long term put options are bought and near term put options with the same strike price are sold.
Depending on the near term outlook, either the neutral calendar put spread or the bear calendar put spread can be employed. When the option trader's near term outlook on the underlying is neutral, a neutral calendar put spread can be implemented using at-the-money put options to construct the spread. The main objective of the neutral calendar put spread strategy is to profit from the rapid time decay of the near term options. Investors employing the bear calendar put spread are bearish on the underlying on the long term and are selling the near term puts with the intention of riding the long term puts for a discount and sometimes even for free.
Out-of-the-money put options are used to construct the bear calendar put spread. A diagonal put spread is created when long term put options are bought and near term put options with a higher strike price are sold.
The diagonal put spread is actually very similar to the bear calendar put spread. The main difference is that the near term outlook of the diagonal bear put spread is slightly more bearish. Buying straddles is a great way to play earnings.
Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time Cash dividends issued by stocks have big impact on their option prices.
This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative Some stocks pay generous dividends every quarter.
You qualify for the dividend if you are holding on the shares before the ex-dividend date To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions.
They are known as "the greeks" Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow Stocks, futures and binary options trading discussed on this website can be considered High-Risk Trading Operations and their execution can be very risky and may result in significant losses or even in a total loss of all funds on your account.
You should not risk more than you afford to lose. Before deciding to trade, you need to ensure that you understand the risks involved taking into account your investment objectives and level of experience.
Information on this website is provided strictly for informational and educational purposes only and is not intended as a trading recommendation service. Toggle navigation The Options Guide. Overview Conversion Reversal Dividend Arbitrage.
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