Business, Legal & Accounting Glossary
A strategy in options trading in which an investor purchases a lower priced put option and sells a higher priced put option at a higher strike price. Since the short put option costs more than the long put option, the investor starts at a profit, which can be retained if the underlying stock remains lower than the higher strike price, causing the higher priced put option to expire worthless.
This is a vertical spread trade because both options must share the same expiration date. Both in-the-money and out-of-the-money put options can be used.
The maximum profit is the initial profit received from the sale of the higher strike price put option and the purchase of the lower strike price put option. The maximum loss is that amount minus the difference between the two strike prices.
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This glossary post was last updated: 20th November, 2021 | 0 Views.