21 lines
1.5 KiB
Plaintext
21 lines
1.5 KiB
Plaintext
EXHIBIT 9.7 ExxonMobil bear put spread.
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If the trader is wrong and ExxonMobil is still above 80 at expiry, both
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puts expire and the 1.30 premium is lost. If ExxonMobil is between the two
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strikes, the 80 puts are ITM, resulting in an exercise, and the 75 puts are
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OTM and expire. The net effect is short stock at an effective price of
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$78.70. The effective sale price is found by taking the price at which the
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short stock is established when the puts are exercised—$80—minus the net
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1.30 paid for the spread. This is the spread’s breakeven at expiration.
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If the trader is right and ExxonMobil is below both strikes at expiration,
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both puts are ITM, and the result is a 3.70 profit and no position. Why a
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3.70 profit? The 80 puts are exercised, making the trader short at $80, and
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the 75 puts are assigned, so the short is bought back at $75 for a positive
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stock scalp of $5. Including the 1.30 debit for the spread in the profit and
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loss (P&(L)), the net profit is $3.70 per share when the stock is below both
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strikes at expiration.
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This is a bearish trade. But is the bear put spread necessarily a better trade
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than buying an outright ATM put? No. The at-expiration diagram makes this
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clear. Profits are limited to $3.70 per share. This is an important difference.
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But because in this particular example, the trader expects the stock to
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retrace only to around $75, the benefits of lower cost and lower theta and
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vega risk can be well worth the trade-off of limited profit. The trader’s |