Put Spreads
Simultaneous purchase of a put, and sale of a different strike put. The two puts in a put spread are for the same number of underlying units and expiration date.
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Payout at Expiration.
The difference between each of the two options (non-negative) payouts, as determined for each option. Each option payout is the strike minus the price of the underlying at expiration , if positive, and zero otherwise.
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The combined payout subtracts the expiration value of the short put from the expiration value of the long put. The maximum payout and net premium of put spreads are bound by the range of the spread. If both options are in the money at expiration the difference in their payouts is the range of the spread.
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Bear Put Spreads.
The purchase of a higher strike put, and sale of a lower strike put. The net premium is positive as the high strike put being purchased has more value than the low strike put being sold. They are a debit position from an investor perspective, as at inception the investor’s account gets debited to pay the net premium.
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The payout of bear put spreads is always positive or zero, before accounting for the negative net premium.
Bull Put Spreads.
The purchase of a lower strike put, and sale of a higher strike put. The net premium is negative as the low strike put has less value than the high strike. They are a credit position from an investor perspective, as at inception an investor’s account gets credited the positive net premium.
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The payout of bull put spreads is always negative or zero, before accounting for the positive net premium.
