Saturday, July 04, 2020 4:54:53 PM
In researching stock options, I do see where various stock option spread strategies exist where one sells one higher strike price put option contract and then buys another lower strike priced put option contract.
The maximum profit for a bull put spread is equal to the difference between the amount received from the sold put and the amount paid for the purchased put. In other words, the net credit received initially is the maximum profit, which only happens if the stock's price closes above the higher strike price at expiry.
The goal of the bull put spread strategy is realized when the price of the underlying moves or stays above the higher strike price. The result is the sold option expires worthless. The reason it expires worthless is that no one would want to exercise it should the stock price move higher.
Using the July 17 $5 and $7.5 put options as an example, if one were bullish on Anavex, you could buy a $5 put contract for $.50 and sell a $7.5 put contract at a price of $2.60 and pocket $2.10 x 100 = $210 per contract as a credit. If the stock price moved above $7.50, the $7.5 put contract would expire worthless, and you keep the $210 without having to purchase Anavex stock at a price of $7.50. If you were wrong about being that bullish, you would of course have to purchase Anavex stock at $7.50, but you still keep the $2.10 per share so your net in that stock would be $7.50 - $2.10 = $5.40. So, wouldn't you have to analyze the stock option spreads to get a clear picture of whether to be bullish or bearish on a stock? Just asking.
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