What is a Put Spread? | Options Trading Strategies | Option Combinations
What is a Put Spread? - Options Trading Strategies
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What is an Options Put Spread?
A put spread is an option spread strategy that involves buying and selling an equal number of put options simultaneously. Unlike the put buying strategy in which the profit potential is unlimited, the maximum profit generated by put spreads are limited but this strategy is relatively cheaper to employ. Unlike the outright purchase of put options which might 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 '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 '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.
What is a Calendar (Horizontal) Put Spread?
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.
What Is a Neutral Calendar Put Spread?
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.
What is a Bear Calendar Put Spread?
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.
What is a Diagonal 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.
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