23 lines
1.0 KiB
Plaintext
23 lines
1.0 KiB
Plaintext
Chapter 22: Basic Put Spreads 331
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TABLE 22-1.
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Put bear spread.
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XYZ Price at January 50 January 60 Total
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Expiration Put Profit Put Profit Profit
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40 -$800 +$1,300 +$500
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45 - 300 + 800 + 500
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50 + 200 + 300 + 500
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55 + 200 200 0
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60 + 200 700 - 500
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70 + 200 700 - 500
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80 + 200 700 - 500
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FIGURE 22-1.
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Put bear spread.
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Stock Price at Expiration
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Beside this difference in the probability of early exercise, the put bear spread
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holds another advantage over the call bear spread. In the put spread, if the underly
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ing stock drops quickly, thereby making both options in-the-rrwney, the spread will
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normally widen quickly as well. This is because, as has been mentioned previously,
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put options tend to lose time value premium rather quickly when they go into-the
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money. In the example above, if XYZ rapidly dropped to 48, the January 60 put would
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be near 12, retaining very little time premium. However, the January 50 put that is
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short would also not retain much time value premium, perhaps selling at 4 points or |