Options Corner
We can see that with regards to our FTSE example that our level of bullishness will dictate the Call strike price that we purchase. If you are particularly bullish and think that we may run towards 6000 by the year end, then perhaps a 5850 Call could be bought. At the time of writing these are priced at 26. The purchase of the same amount of Calls as those sold with the Bull Put spread element of the strategy would, in this example, result in a net overall credit of 27. If you are particularly bullish, then you may purchase twice or more the amount of Calls as sold in the Bull Put Spread example so your net overall credit would be effectively nil in this case and your breakeven level rises from 5673 (5700 - 27) to 5700 — the sold Put strike price. In effect, you are simply using the credit from the Bull Put spread sale to finance the purchase of the long Call on a 1 for 1 strategy implementation.
The benefits of a Bull Put Spread are as follows It limits your losses if the index or stock suddenly plunges. Your loss is limited to the total differences between the strike prices of your short Put (the Put you sold) and long Put (the Put you purchased). It has the ability to profit, even if the stock barely budges in price as a consequence of the net credit receipt. The risk is significantly lower than writing a naked Put as your maximum downside is limited by the Put option you purchased. In the event the stock or index continues to decline, an investor can buy to close the short Put position and continue to lock in gains from the long Put as the price of the underlying stock drops.
96 | www.financial-spread-betting.com | December 2012