Name: Back Spread w/ Puts
Setup: Buy (long) 2 Strike A puts and Sell (short) Strike B put – contracts will have the same expiration
Bias: Very Bearish
Break-Even: Two break-even points:
- Strike B – Strike A – Credit received
- Strike B – Credit received
Max Profit: Limited – Max profit if stock goes to $0
Max Loss: Strike B – Strike A – Credit received
Margin: Margin requirement equals the difference between the strikes of the short put spread
Time Decay: Time Decay is mixed on this play and depends where the underlying price is relative to the strikes. If the underlying is above Strike B then time decay is a positive effect as it will allow your options to expire worthless and to collect the credit. If the underlying is below Strike B time decay is a negative effect as it will eat away at the long puts value.
Implied Volatility: An increase of implied volatility will be a positive effect on this play. It will increase the value of your options plus it will set your play up for a big move which is what you want
Notes: None at this time
Featured in Trade Review: None at this time
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