Options strategy: The bear put spread

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A short put spread obligates you to buy the stock at strike price B if the option is assigned but gives you the right to sell stock at strike price A.

A short put spread is an alternative to the short put. One advantage of this option put spread is that you want both options to expire worthless. You may wish to consider ensuring that strike B is around one standard deviation out-of-the-money at initiation. That option put spread increase your probability of success. However, the further out-of-the-money the strike price is, the lower the net credit received will be from this spread. As a general rule of thumb, you may wish to consider running this strategy approximately days from expiration to take advantage of accelerating time decay as expiration approaches.

Of course, this depends on the underlying stock and market conditions such as implied option put spread. You may also be anticipating neutral activity if strike Option put spread is out-of-the-money. You want the stock to be at or above strike B at expiration, so both options will expire worthless. The net credit received when establishing the short put spread may be applied to the initial margin option put spread.

Keep option put spread mind this requirement is on a per-unit basis. For this strategy, the net effect of time decay is somewhat positive. It will erode the value of the option you sold good but it will also erode the value of the option you bought bad.

After the strategy is established, the effect of implied volatility depends on where the stock is relative to your strike prices. If your forecast was correct and the stock price option put spread approaching or above strike B, you want implied volatility to decrease. If your forecast was incorrect and the stock price is approaching or below strike A, you want implied volatility to increase for two reasons.

First, it will increase the value of the near-the-money option you bought faster than the in-the-money option option put spread sold, thereby decreasing the overall value of the spread. Second, it reflects an increased probability of a price swing which will hopefully be to the upside.

Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options.

Options investors may option put spread the entire amount of their investment in a relatively short period of time. Multiple leg options strategies involve additional risksand may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies.

Implied volatility represents the consensus of the marketplace option put spread to the future level of stock price volatility or the probability of reaching a specific price point. The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract.

There is no guarantee that the forecasts of implied volatility or the Greeks will be correct. Ally Invest provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. System response and access times may vary due to market conditions, system performance, and other factors.

Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy.

The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees of future results. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns.

The Options Playbook Featuring 40 options strategies for bulls, bears, rookies, all-stars and everyone in between.

The Strategy A short put spread obligates you to buy the stock at strike price B if the option is assigned but gives you the right to sell stock at strike price A. Options Guy's Tips One advantage of option put spread strategy is that you want both options to expire worthless.

Both options have the same option put spread month. When to Run It You're bullish. Break-even at Expiration Strike B minus the option put spread credit received when selling the spread.

The Sweet Spot You option put spread the stock to be at or above strike B at expiration, so both options will expire worthless. Maximum Potential Profit Potential profit is limited to the net credit you receive when you set up the strategy. Maximum Potential Option put spread Risk is limited to the difference between strike A and strike B, minus the net credit option put spread. Ally Invest Margin Requirement Margin requirement is the difference between the strike prices.

As Time Goes By For this strategy, the net effect of time decay is somewhat positive. Implied Volatility After the strategy is established, the option put spread of implied volatility depends on where the stock is relative to your strike prices. Use the Technical Analysis Tool to look for bullish indicators.

Use the Probability Calculator to verify that strike B is about one standard deviation out-of-the-money.

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A long put spread gives you the right to sell stock at strike price B and obligates you to buy stock at strike price A if assigned. This strategy is an alternative to buying a long put. Selling a cheaper put with strike A helps to offset the cost of the put you buy with strike B.

That ultimately limits your risk. When implied volatility is unusually high e. You may wish to consider buying a shorter-term long put spread, e. Potential profit is limited to the difference between strike A and strike B, minus the net debit paid.

For this strategy, the net effect of time decay is somewhat neutral. After the strategy is established, the effect of implied volatility depends on where the stock is relative to your strike prices. If your forecast was correct and the stock price is approaching or below strike A, you want implied volatility to decrease. If your forecast was incorrect and the stock price is approaching or above strike B, you want implied volatility to increase for two reasons.

First, it will increase the value of the out-of-the-money option you bought faster than the near-the-money option you sold, thereby increasing the overall value of the spread. Second, it reflects an increased probability of a price swing which will hopefully be to the downside. Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options. Options investors may lose the entire amount of their investment in a relatively short period of time.

Multiple leg options strategies involve additional risks , and may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies.

Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point. The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that the forecasts of implied volatility or the Greeks will be correct.

Ally Invest provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. System response and access times may vary due to market conditions, system performance, and other factors.

Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy.

The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees of future results.

All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. The Options Playbook Featuring 40 options strategies for bulls, bears, rookies, all-stars and everyone in between.

The Strategy A long put spread gives you the right to sell stock at strike price B and obligates you to buy stock at strike price A if assigned. Options Guy's Tips When implied volatility is unusually high e. Both options have the same expiration month. The Sweet Spot You want the stock to be at or below strike A at expiration.

Maximum Potential Profit Potential profit is limited to the difference between strike A and strike B, minus the net debit paid. Maximum Potential Loss Risk is limited to the net debit paid.

Ally Invest Margin Requirement After the trade is paid for, no additional margin is required. As Time Goes By For this strategy, the net effect of time decay is somewhat neutral. Implied Volatility After the strategy is established, the effect of implied volatility depends on where the stock is relative to your strike prices. Use the Technical Analysis Tool to look for bearish indicators. Break-even at Expiration Strike B minus the net debit paid.