Strategic Stock Brokers Pvt. Ltd

	Login
	Client Login
	Branch Login
	DP Login
	Mutual Fund Login
	PMS Client Login

A put spread is the simultaneous purchase and sale of identical call options but with different exercise prices. Here we are the Buyer of a put spread. The trader buy a put with Higher exercise price and write a put with a Lower exercise and paying a net premium for the position.

	Profit	Limited, Max. Profit = (B - A) – Net Premium
	Loss	Limited, Max. Loss = Net Premium
	Break Even	Higher Strike Price (B) - Net Premium Paid
	Use	Bearish Outlook
	Volatility	Neutral
	Formation	Buying Put with Higher Exercise Price (B)
		Writing Put with Lower Exercise Price (A)

Long Put (B) (Lower Strike Price)		Short Put (A) (Higher Strike Price)
Position	Buyer	Position	Writer
Spot Price	2080	Spot Price	2080
Strike Price	2100	Strike Price	2060
Premium Paid	Rs. 33	Premium Received	Rs. 18

	Break-Even = Higher Strike Price - Net Premium Paid
	= 2100 - (33 - 18)
	= 25

	Maximum Profit = Higher Strike Price – Lower Strike Price – Net Premium
	= 2100 – 2060 – 15
	= 35

	Maximum Loss = Net Premium Paid
	= (33 - 18)
	= 15

Pay-off Structure of Bear Put Spread :

Possible NIFTY Index	Net Premium Paid	Profit/Loss on Long Put (B)	Profit/Loss on Short Put (A)	Net Profit/Loss	Remarks
2030	15	37	-30	25	In-The-Money
2040	15	27	-20	25	In-The-Money
2050	15	-17	-10	25	In-The-Money
2060	15	7	0	25	In-The-Money
2070	15	-3	10	-15	In-The-Money
2080	15	-13	20	5	In-The-Money
2090	15	-23	30	-5	Out-The-Money
2100	15	-33	40	-15	Out-The-Money
2110	15	-33	50	-15	Out-The-Money
2120	15	-33	50	-15	Out-The-Money
2130	15	-33	50	-15	Out-The-Money

	Pay-off Graph of Bear Put Spread :

Interpretation:

	An investor with a bearish market outlook should: buy a put spread. The "Bear Put Spread" allows the investor to participate to a limited extent in a bear market, while at the same time limiting risk exposure.

	To "buy a put spread" is to purchase a put with a higher exercise price and to write a put with a lower exercise price. The investor pays a net premium for the position.

	To put on a bear put spread investor buy the higher strike put that is buyer of NIFTY index Put option with strike price of 2100. And sell the lower strike put that is the writer of the NIFTY Index Put option with strike price of 2060.

	The investor's profit potential is limited. When the market price falls to or below the lower exercise price, both options will be in-the-money and the investor will realize his maximum profit when he recovers the net premium paid for the options. So the Maximum profit = (Higher Strike Price – Lower Strike Price – Net Premium Paid) = 2100 – 2060 – 15 = Rs. 25. At any price less than the lower exercise the investor is making money.

	The investor's potential loss is limited. The investor has offsetting positions at different exercise prices. If the market rises rather than falls, the options will be out-of-the-money and expire worthless. Since the loss for the investor is the net premium paid. That is the (33 – 18) = Rs. 15

	The investor breaks even when the market price equals the higher exercise price less the net premium. Break-Even = (2100) – (33-18) = 2085.

	For the strategy to be profitable, the market price must fall. When the market falls beyond 2085, the investor profits.

Usefull Links: BSE - NSE - SEBI - CDSL - NSDL - RBI - MCX - NCDEX