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Buy Vertical Put Spread
A bearish vertical put spread consist of the purchase of a higher strike put and a sale of
lower strike put. Since the higher strike put will theoretically always be higher than the
lower strike put, the buyer pays a premium. It is a bearish directional strategy with
limited risk and limited reward. This spread is closely related to sell vertical call spread
as the combined price of these two spreads will equal the price difference between the two strikes.
Breakeven point at expiration occurs when futures price equals the higher strike, less premium paid.
Maximum profit = difference between strikes, minus premium paid.
Maximum loss = premium paid.
- In The Money: Higher strike less than futures price.
- At The Money: Higher strike put at or near futures price.
- Out Of The Money: Higher strike put is less than futures price.
- Delta is negative. Lower prices help.
- Vega is positive. Higher implied volatility helps.
- Theta is negative. The passage of time hurts.
- Delta is always negative. Lower prices help.
- Vega may turn negative. Higher implied volatility hurts
- Theta may turn positive. The passage of time helps.
