22 lines
1.6 KiB
Plaintext
22 lines
1.6 KiB
Plaintext
Chapter 22: Basic Put Spreads 335
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make the I-point profit from the sale of that put, reducing his net cost for the April
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50 put to ½ point. Then, he would become bearish, hoping for the underlying stock
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to decline in price substantially before April expiration in order that he might be able
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to generate large profits on the April 50 put he holds.
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Just as the bullish calendar spread with calls can be a relatively attractive strat
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egy, so can the bearish calendar spread with puts. Granted, two criteria have to be
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fulfilled in order for the position to work to the optimum: The near-term put must
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expire worthless, and then the underlying stock must drop in order to generate prof
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its on the long side. Although these conditions may not occur frequently, one prof
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itable situation can more than make up for several losing ones. This is true because
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the initial debit for a bearish calendar spread is small, ½ point in the example above.
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Thus, the losses will be small and the potential profits could be very large if things
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work out right.
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The aggressive spreader must be careful not to "leg out" of his spread, since he
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could generate a large loss by doing so. The object of the strategy is to accept a rather
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large number of small losses, with the idea that the infrequent large profits will more
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than offset the sum of the losses. If one generates a large loss somewhere along the
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way, this may ruin the overall strategy. Also, if the underlying stock should fall to the
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striking price before the near-term put expires, the spread will normally have
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widened enough to produce a small profit; that profit should be taken by closing the
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spread at that time. |