Introduction to Put Spreads
Options trading is a way people can invest their money in the stock market. One popular strategy is called the put spread. In this article, we will talk about put spreads, the different types, the good and bad things about them, and how to make and manage them.
The Basics of Put Spreads
A put spread is a way to invest in the stock market by buying and selling two put options with different prices but the same end date. It is used to make money based on how you think a stock will do. There are two main types of put spreads: bull put spreads and bear put spreads.
Types of Put Spreads
There are two main types of put spreads: bull put spreads and bear put spreads. Each one is used for a different reason.
Bull Put Spreads
A bull put spread is used when you think a stock will go up a little bit.
How to Make a Bull Put Spread
To make a bull put spread, you sell a put option with a higher price and buy a put option with a lower price. Both options have the same end date. You make money when you sell the higher priced option and use some of that money to buy the lower priced option.
Example of a Bull Put Spread
Let’s say you think the price of a stock called XYZ will go up a little. It’s now worth $50. You sell an XYZ put option for $55 and get $4. You buy an XYZ put option for $45 and spend $1. You now have $3 ($4 – $1) extra.
When to Use Bull Put Spreads
Use bull put spreads when you think a stock will go up a little bit.
Bear Put Spreads
A bear put spread is used when you think a stock will go down a little bit.
How to Make a Bear Put Spread
To make a bear put spread, you buy a put option with a higher price and sell a put option with a lower price. Both options have the same end date. You spend money to buy the higher priced option, but you also make some money when you sell the lower priced option.
Example of a Bear Put Spread
Let’s say you think the price of a stock called XYZ will go down a little. It’s now worth $50. You buy an XYZ put option for $55 and spend $6. You sell an XYZ put option for $45 and get $2. You’ve now spent $4 ($6 – $2) extra.
When to Use Bear Put Spreads
Use bear put spreads when you think a stock will go down a little bit.
Good Things About Put Spreads
Put spreads are good because they:
- Have less risk than other options trading strategies.
- Cost less money to use.
- Can be changed based on what you think will happen to a stock.
Bad Things About Put Spreads
Put spreads have some problems:
- You can’t make as much money as with other options trading strategies.
- They can be hard to understand.
How to Make a Put Spread
To make a put spread, you need to choose the prices for the options and pick an end date.
Choosing the Prices
Pick the prices based on how you think the stock will do. For bull put spreads, pick a higher price close to the stock’s price and a lower price below it. For bear put spreads, pick a higher price close to the stock’s price and a lower price even lower.
Picking the End Date
The end date is how long you think it will take for the stock to change. A longer end date gives the stock more time
to change, but it can also be riskier. A shorter end date is less risky but gives the stock less time to change.
Things That Affect How Much Money You Make
There are some things that can change how much money you make with a put spread:
- The stock price going up or down.
- Time passing.
- How much people think the stock price will change.
Examples of Put Spreads in Real Life
Here are some examples of bull and bear put spreads:
Bull Put Spread Example
You sell an XYZ put option for $55 and get $4. You buy an XYZ put option for $45 and spend $1. You now have $3 ($4 – $1) extra. If the stock goes above $55, you keep the $3. If it goes below $45, you can lose up to $7 per share.
Bear Put Spread Example
You buy an XYZ put option for $55 and spend $6. You sell an XYZ put option for $45 and get $2. You now spent $4 ($6 – $2) extra. If the stock goes below $45, you can make up to $6 per share. If it goes above $55, you can lose up to $4 per share.
Managing Put Spreads
You can change or end a put spread if you need to.
Changing the Spread
Changing the spread means changing the prices or end date of the options. You might do this to make more money, lower your risk, or because the stock changed more than you thought it would.
Ending the Position
Ending a put spread means buying back the option you sold and selling the option you bought. You might do this if you think the stock will change in a way you didn’t expect or if you already made enough money.
Key Points to Remember
- Put spreads are ways to invest in the stock market with options.
- There are two types of put spreads: bull put spreads (when you think a stock will go up a little) and bear put spreads (when you think a stock will go down a little).
- Put spreads have less risk and cost less money, but you can’t make as much money as with other options trading strategies.
- To make a put spread, choose the prices for the options and pick an end date.
- The money you make with a put spread can be affected by the stock price, time passing, and how much people think the stock price will change.
- You can change or end a put spread if you need to.
Conclusion
In the end, put spreads are a helpful way to invest in the stock market using options. They can be good for people who think a stock will change a little bit. Remember, put spreads can be hard to understand, so it’s important to learn more about options trading before you start using them.
FAQs
Is a put spread bullish or bearish?
A put spread can be bullish or bearish. A bull put spread is used when you think a stock will go up a little bit. A bear put spread is used when you think a stock will go down a little bit.
What is an example of a put spread?
A bull put spread example: You sell a $55 XYZ put option and get $4. You buy a $45 XYZ put option and spend $1. You now have $3 ($4 – $1) extra.
What does it mean to sell a put spread?
Selling a put spread means creating a bull put spread by selling a higher-priced put option and buying a lower-priced put option with the same end date.
What are the risks of put spreads?
The risks of put spreads include limited profit potential and complexity, which can be hard for beginners to understand.
What is an example of a put credit spread?
A put credit spread is another name for a bull put spread. For example, you sell a $55 XYZ put option and get $4. You buy a $45 XYZ put option and spend $1. You now have $3 ($4 – $1) extra.
How does a put spread make money?
A put spread makes money when the stock price moves as expected. A bull put spread makes money if the stock price goes up, and a bear put spread makes money if the stock price goes down.
How do you lose money in a put spread?
You lose money in a put spread when the stock price moves opposite to what you expected. If the stock price goes down for a bull put spread, or if it goes up for a bear put spread, you can lose money.
What happens when a put spread expires in-the-money?
When a put spread expires in-the-money, the options are worth money. For a bull put spread, you keep the extra money you got when you made the spread. For a bear put spread, you can make more money if the stock price went down as you expected. But, you may need to buy and sell the stocks related to the options, which could lead to extra costs.
What is a bullish put spread?
A bullish put spread, also known as a bull put spread, is an options strategy used when you think a stock will go up a little bit. It involves selling a higher-priced put option and buying a lower-priced put option with the same end date.
What is the max profit for a put ratio spread?
The max profit for a put ratio spread depends on the specific options used in the strategy. It is limited, and the exact amount can be calculated by subtracting the cost of creating the spread from the difference between the strike prices of the options.
What is a put spread strategy?
A put spread strategy is an options trading strategy that involves buying and selling two put options with different strike prices but the same expiration date. It is used to profit from a moderate change in the stock price, either up or down, with limited risk.
How do you exit a bull put spread?
To exit a bull put spread, you buy back the put option you sold and sell the put option you bought. You might do this if you think the stock will change in a way you didn’t expect or if you already made enough money.
What is the opposite of a put spread?
The opposite of a put spread is a call spread. A call spread is an options trading strategy that involves buying and selling two call options with different strike prices but the same expiration date.
What is the best strategy for bull put spread?
The best strategy for a bull put spread is to choose the right strike prices and expiration date based on your outlook for the stock, manage your risk, and be prepared to adjust or exit the position if needed.
How do you hedge a bull put spread?
To hedge a bull put spread, you can use other options strategies, like buying a put option with a lower strike price or using a call spread. These strategies can help protect your investment if the stock price moves against your expectations.
Which is better bull call spread or bull put spread?
The choice between a bull call spread and a bull put spread depends on your outlook for the stock, your risk tolerance, and your investment goals. A bull call spread has a lower initial cost but may have a lower profit potential, while a bull put spread can generate income but has a higher risk.
What is the difference between a call spread and a put spread?
The difference between a call spread and a put spread is the type of options used. A call spread uses call options, which give the buyer the right to buy a stock at a certain price. A put spread uses put options, which give the buyer the right to sell a stock at a certain price. Both strategies are used to profit from a moderate change in the stock price with limited risk.