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Strategy View
Investor thinks that the market will not fall, but wants to cap the risk.
Conservative strategy for one who thinks that the market is more likely
to rise than fall.
Strategy Implementation
Call option is bought with a strike price of a
and another call option sold with a strike of b,
producing a net initial debit,
- or -
Put option is bought with a strike of a
and another put sold with a strike of b,
producing a net initial credit.
Upside Potential
Limited. With calls, upside is the difference between the strikes and the
initial debit. With puts, it is the initial credit. Maximum profit occurs
if the underlying trades above strike b.
Downside Risk
Limited. Bull spreads created with calls creates an initial debit that
is the risk; With puts, the difference between strikes and the initial
credit is the risk. Worst case occurs when the underlying instrument at
option expiration is trading lower than the strike a.
Margin
Possibility for margin requirements to be off-set.
Comment
Time decay is not too significant due to the balanced position. |
