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What is a put spread?

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What is a put spread?

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A Put Spread is an options trading combo strategy where you buy a Put and sell another one at the same time but with different strikes. This option strategy has limited profit and limited loss potential.

A Put Spread is an options trading combo strategy where you buy a Put and sell another one at the same time but with different strikes. This option strategy has limited profit and limited loss potential.

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What is a put spread?

  1. 1. What Is A Put Spread? 1 Options Trading
  2. 2. What is a Put Spread? Most people who start to invest their time and money into options trading come to realize they need to use options spreads as well. Let's see what a Put Spread is. A Put Spread is an options trading combo strategy where you buy a Put and sell another one at the same time but with different strikes. This option strategy has limited profit and limited loss potential. 2
  3. 3. Bear Put Spread vs. Bull Put Spread There are two types of Put Spreads to choose from in options trading. Either you buy a Put Spread or you sell a Put Spread. If you buy a Put Spread it is called Bear Put Spread, when you sell it the name is Bull Put Spread. See below two examples of them. 3
  4. 4. Bear Put Spread - A Debit Option Trading Strategy Bear Put spread is a debit option strategy, which means you BUY the Put spread. In this example you buy the higher strike Put and you sell the lower strike Put. Thus you create a bearish bias with Put spreads. If your underlying goes up, you lose around $200, if it goes down beyond your shorted strike, you will make the maximum profit which is around $300 in this case.This is a debit option strategy which means you get to PAY for this in the form of a premium once it's expired. 4
  5. 5. Bear Put Spread risk graph 5
  6. 6. Bull Put Spread - A Credit Option Trading Strategy In options trading a Bull Put Spread is when you SELL the Put Spread. So you sell the higher strike Put and buy the lower strike Put. This way you create a bullish bias trading options. You will make the max profit when the price stays above the shorted Put strike and you will incur the max loss when the price goes down to the shorted strike. This is a credit option strategy which means you RECEIVE a premium for shorting it. 6
  7. 7. Bull Put Spread risk graph 7
  8. 8. What is your trading bias? If you are bearish, you should go with the Bear Put Spread. You have to understand that buying means that your strategy is a DEBIT strategy, and you pay for it. Time is working against you, which means that if the underlying doesn't move into your favor quickly, you will lose money with time decay. On the other hand if you are bullish, you will have to sell a Put Spread which is a Bull Put Spread. In this way you don't have a clear bias. Either the market stays sideways or goes up, you will make money. Time will work on your side since this is a CREDIT strategy. The choice depends on your market bias. But I guess you see that you have a higher chance to make money with Bull Put Spread because not only time is working for you, but you also have two directions where you can make money: sideways and up move. 8
  9. 9. Feel free to ask me! 9 Email: gery@optionsrules.com My webpage: http://www.optionsrules.com/ You can find me: Facebook: https://www.facebook.com/OptionsRules1 YouTube: https://www.youtube.com/user/optionsrules Twitter: https://twitter.com/optionsrules LinkedIn: http://hu.linkedin.com/pub/gery-nagy/6a/513/261 Skype: opcioguru

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