Trading Long Put Vertical Spreads
Buying a put option provides an individual with the opportunity to profit from a decline in the price of the underlying stock, stock index or futures contract. In so doing, a put buyer also enjoys risk limited to the premium paid, while profits to the upside are increased through leverage. However, the reality of options trading is that trading is a tradeoff. With virtually every strategy there are alternatives, and any time you gain an advantage somewhere you give up an advantage someplace else. This forces traders to identify their objectives at the time they enter a trade.
This tradeoff is never more clear than when a trader is looking to profit on a falling stock. This can be accomplished with both a bear put spread or a simple put option. Read on to find out how each of these strategies works and how to determine which one is likely to provide the best results in a given situation.
Typically you use this strategy when you are bearish and the market is not moving much.
When Implied volatility is not there we may play a Long Put Vertical Spread. A long put vertical spread is a bearish, defined risk strategy made up of a long and short put at different strikes in the same expiration.
Bear Vertical Put Spread
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.
When do you trade bear put spread?
A long put vertical spread is a bearish, defined risk strategy made up of a long and short put at different strikes in the same expiration. This strategy is used when you have a Directional Assumption. You are Bearish and select this strategy when options has a low implied volatility.
How do you Setup this strategy
The long put vertical spread is setup in the flowing way:
– Buy ITM Put
– Sell OTM Put
Ideal Implied Volatility Environment: Low
Max Profit: Distance Between Put Strikes – Net Debit Paid
How to Calculate Breakeven(s): Long Put Strike – Debit Paid
This strategy is an alternative to buying a long put. Selling a cheaper put with strike A helps to offset the cost of the put you buy with strike B. That ultimately limits your risk. The bad news is, to get the reduction in risk, you’re going to have to sacrifice some potential profit.
See the profit loss diagram below: