Basic Options Strategies: Bear Put Spread (Vertical Spread) - Part Three
...Continued From Part Two
Break-Even-Point (BEP)?
BEP: Strike Price of Purchased Put - Net Debit Paid
Volatility
If Volatility Increases: Effect Varies
If Volatility Decreases: Effect Varies
The effect of an increase or decrease in either the volatility of theunderlying stock may be noticed in the time value portion of theoptions’ premiums. The net effect on the strategy will depend onwhether the long and/or short options are in-the-money orout-of-the-money, and the time remaining until expiration.
Time Decay?
Passage of Time: Effect Varies
The effect of time decay on this strategy varies with the underlyingstock’s price level in relation to the strike prices of the long andshort options. If the stock price is midway between the strike prices,the effect can be minimal. If the stock price is closer to the higherstrike price of the purchased put, losses generally increase at afaster rate as time passes. Alternatively, if the underlying stockprice is closer to the lower strike price of the written put, profitsgenerally increase at a faster rate as time passes.
Alternatives before expiration?
A bear put spread purchased as a unit for a net debit in onetransaction can be sold as a unit in one transaction in the optionsmarketplace for a credit, if it has value. This is generally the mannerin which investors close out a spread before its options expire, inorder to cut a loss or realize profit.
Alternatives at expiration?
If both options have value, investors will generally close out a spreadin the marketplace as the options expire. This will be less expensivethan incurring the commissions and transaction costs from a transfer ofstock resulting from either an exercise of and/or an assignment on theputs.
If only the purchased put is in-the-money and has value as it expires,the investor can sell it in the market place before the close of themarket on the option’s last trading day. On the other hand, theinvestor can exercise the put and either sell an equivalent number ofshares that he owns or establish a short stock position.
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