← Strategy LabLesson 43 · 4:04
Put backspread
Summary
A put backspread suits a view that XYZ crashes. You collect $59 to open, keep it if XYZ rises or stays flat, and make more as XYZ falls below $90.59, up to $9,059 if it went to zero; the worst case is a $441 loss if XYZ ends right at $95. You break even at $99.41 and $90.59.
Key terms
- put backspread
- Sell one put and buy two puts at a lower strike, here collecting a small credit: a bet on a crash with a valley at the lower strike.
- net credit
- When a pair of trades brings cash in overall.
- valley
- The dip in a backspread's last-day line, deepest at the bought strike, where a small move loses the most.
- time value
- The rest of an option's price, paid for the chance things get better before the end, and gone by the last day.
- break-even
- The stock price on the last day where you neither make nor lose money: strike plus premium for a call, strike minus premium for a put.
Check yourself
Answer each question to see why the right answer is right.
1. How does the lesson's put backspread open?
2. XYZ dips a little and ends exactly at $95. What is your result?
3. XYZ falls hard and ends at $85. What is your result?
4. XYZ drops to $95 right away and then sits there. What happens as the days pass?
5. XYZ rises and ends at $110. What is your result?
Finished the video and the quiz? .