banner-meus-ynvestimentos

Bull Put Spread

bull-call-spread

1. Definition

The Bull Put Spread, also known as Short Put Spread or Put Credit Spread, is a strategy for taking advantage of hikes on the underlying asset’s prices. This strategy comprises buying an ATM Put and selling an OTM Put, this latter at a higher price, with the same maturity. It works like the Bull Call Spread, but using Puts rather than Calls.

Buying a Put At-The-Money: buying a Put with strike prices as close as possible to the current share prices. Buying a Put gives you rights of selling a share until the expiry date for the strike price.

Selling a Put Out-The-Money: selling a Put at prices above the share prices. Selling a Put forces you to buy a share until the expiry date, for an established price.


2. Objective

Earnings from hiking markets, with some protection against drops, especially when there are uncertainties at the market regarding the upward trend. This operation generates gains from hikes until certain point, and limited losses in the case of drops.


 3. How it works

In this strategy, an ATM Put is bought, paying a premium and another OTM Put is sold, receiving a premium. The initial position is positive, with premiums received exceeding those paid, so the graphs work as follows:

Buying a Put + Selling a Put = Bull Put Spread

Buying a Put

gráfico Long Put_clean

 +

Selling a Put

gráfico Short Put_clean

 =

Bull Put Spread

gráfico Bull Put Spread_clean

Caption:

Red = Losses

Yellow = Losses from premiums paid

Green = Profits

Earnings: earnings are always limited to the exercise prices minus the premiums paid (a credit in this case, as premiums received are larger). The maximum profits occur when the underlying asset’s prices by the expiration exceed the exercise prices for the Put sold, being the premium received.

Losses: losses are also limited, and their maximum level happens when the share prices are below the strike for the Put bought, being the difference between the strike prices minus the credit received from options premiums.


4. Example

Consider the following data:

Asset

Vale

Date

09/10/2013

Maturity

10/21/2013

Share prices

32,45

Days before the expiration

41

Number of options

1.000

To set up the operation, the investor buys a VALEV32 ATM Put paying a premium of R$ 0.78 per option, and sells a VALEV33 OTM Put, receiving R$ 1.23 per option.

Summary:

Type of option

Asset

Series

Number of options

Premium

Strike Price

Liquidation

Buying a Put

Vale

VALEV32

1.000

R$0,78

32

R$ -780,00

Selling a Put

Vale

VALEV33

-1.000

R$1,23

33

R$ 1.230,00

Total

0,45

R$ 450,00

By the expiry date, results depend on the share prices as follows:

Share prices by the expiry date

Buying a Put

Selling a Put

Results

R$ 27.00

R$ 4,220.00

-R$ 4,770.00

-R$ 550.00

R$ 28.00

R$ 3,220.00

-R$ 3,770.00

-R$ 550.00

R$ 29.00

R$ 2,220.00

-R$ 2,770.00

-R$ 550.00

R$ 30.00

R$ 1,220.00

-R$ 1,770.00

-R$ 550.00

R$ 31.00

R$ 220.00

-R$ 770.00

-R$ 550.00

R$ 32.00

-R$ 780.00

R$ 230.00

-R$ 550.00

R$ 33.00

-R$ 780.00

R$ 1,230.00

R$ 450.00

R$ 34.00

-R$ 780.00

R$ 1,230.00

R$ 450.00

R$ 35.00

-R$ 780.00

R$ 1,230.00

R$ 450.00

R$ 36.00

-R$ 780.00

R$ 1,230.00

R$ 450.00

R$ 37.00

-R$ 780.00

R$ 1,230.00

R$ 450.00

R$ 38.00

-R$ 780.00

R$ 1,230.00

R$ 450.00

Results:

If Vale’s share worth less than R$ 32.00 at the maturity, the investor exercises the selling option, and will be selling shares at R$ 32.00. However, he’ll be also exercised to buy shares at R$ 33.00, losing R$ 1.00 per share. But he got a R$ 0.55 from premiums, and had his losses partially offset. Otherwise, if shares exceed R$ 33.00, he won’t be exercising his rights of selling shares neither being exercised to buy shares, so his profits hit R$ 0.45 per share, or the balance between the premiums paid and received. Look the graph below:

Bull Put Spread Pronto

Caption:

Red = Losses

Yellow = Losses from premiums paid

Green = Profits

Earnings: the operation results in profits if Vale’s shares exceed R$ 32.55. The investor is forced to buy shares for R$ 33.00, however, as he received R$ 450.00 for the premium of the options, he’ll be earnings for any share price above R$ 32.55. Maximum profits reach R$ 450.00 in total, when shares are priced above R$ 33.00, and this maximum profit in net credit from the sale of the option less the purchase option

Losses: the investor loses for share prices below R$ 32.55, with maximum losses reaching R$ 550.00. Between R$ 32.00 and R$ 32.55, the investor will have loss, but this loss will be reduced according to the share price at maturity. The maximum loss is when the Vale’s shares is below R$ 32.00. In this case, both options will be exercised. The investor will be required to buy the stock for R$ 33.00 per share and sell to R$ 32.00, with a loss of R$ 1.00 per share. However, as he received a premium of R$ 0.45, your maximum loss will be R$ 550.00 (R$ 1.00 – R$ 0.45 = R$ 0.55 * 1,000).

Você também poderá gostar...