Add training workflow, datasets, and runbook
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Put Bear Spread
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Buy XYZ January 60 put
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Sell XYZ January 50 put
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(debit spread)
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Part Ill: Put Option Strategies
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Call Bear Spread
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Buy XYZ January 60 call
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Sell XYZ January 50 call
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(credit spread)
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The put bear spread has the same sort of profit potential as the call bear spread.
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There is a limited maximum potential profit, and this profit would be realized if XYZ
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were below the lower striking price at expiration. The put spread would widen, in this
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case, to equal the difference between the striking prices. The maximum risk is also
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limited, and would be realized if XYZ were anywhere above the higher striking price
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at expiration.
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Example: The following prices exist:
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XYZ common, 55;
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XYZ January 50 put, 2; and
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XYZ January 60 put, 7.
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Buying the January 60 put and selling the January 50 would establish a bear
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spread for a 5-point debit. Table 22-1 will help verify that this is indeed a bearish
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position. The reader will note that Figure 22-1 has the same shape as the call bear
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spread's graph (Figure 8-1). The investment required for this spread is the net debit,
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and it must be paid in full. Notice that the maximum profit potential is realized any
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where below 50 at expiration, and the maximum risk potential is realized anywhere
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above 60 at expiration. The maximum risk is always equal to the initial debit required
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to establish the spread plus commissions. The break-even point is 55 in this example.
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The following formulae allow one to quickly compute the meaningful statistics
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regarding a put bear spread.
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Maximum risk = Initial debit
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Maximum profit = Difference between strikes - Initial debit
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Break-even price = Higher striking price - Initial debit
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Put bear spreads have an advantage over call bear spreads. With puts, one is
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selling an out-of-the-money option when setting up the spread. Thus, one is not risk
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ing early exercise of his written option before the spread becomes profitable. For the
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written put to be in-the-money, and thus in danger of being exercised, the spread
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would have to be profitable, because the stock would have to be below the lower
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striking price. Such is not the case with call bear spreads. In the call spread, one sells
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an in-the-money call as part of the bear spread, and thus could be at risk of early exer
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cise before the spread has a chance to become profitable.
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