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intro to spreads

Short Put Vertical

Analyzing the risk profile of a short put vertical
Short put verticals are a _______ strategy.
Bearish
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Safe
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Bullish
Correct! Short put verticals profit fastest when the underlying price increases. They are a bullish strategy.
Neutral
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You sold the 35/40 put spread for $1.10. What is your maximum potential profit and loss?
$5P, $1.10L
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$1.10P, $5L
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$3.50P, $5L
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$1.10P, $3.90L
Correct! The most you can make on a short put spread is the credit you collected for it. Max potential loss is calculated by subtracting the credit from the width of the strikes. $5 - $1.10 = $3.90
True or false: OTM short put spreads have a low probability of profit.
True
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False
You got it! Short out-of-the-money put spreads have a relatively high probability of profit (greater than 50%).
Which of these short put spreads will require the most buying power?
25/35
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35/45
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45/60
Correct! This spread is the widest at $15. Your brokerage firm will require $1500 to hold a position like this.
60/65
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XYZ is trading for $35. Which of these put spreads has the most intrinsic value?
25/35
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25/40
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40/45
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35/45
Correct! The 25/35 spread has $0 intrinsic because it is fully OTM. The 25/40 only has $5 of intrinsic value because it is partially OTM. The 40/45 spread is fully ITM but only has $5 of intrinsic value. Finally, the 35/45 put spread fully ITM and has $10 of intrinsic value.
You sold a $5-wide put spread for $1.25. What is your approximate POP (probability of profit)?
25%
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50%
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65%
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75%
Correct! To calculate, simply divide your total risk by the width of the spread and multiply by 100%. Your risk on this trade is $3.75 (calculate by subtracting $1.25 from the $5-wide spread). Divide $3.75 by the $5 width and multiply by 100% to get a 75% POP.
XYZ is trading for $43. Which of these put spreads are on the dance floor?
25/35
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35/45
Correct! XYZ is trading between the 35 and 45 strikes. If it rises above 45 at expiration, you'll have a max winner. If it falls below 35 at expiration, you'll have a max loser.
45/55
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55/60
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Would you rather your short put vertical expire ITM, ATM, or OTM?
ITM
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ATM
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OTM
Correct! Any time you sell a short vertical, you want it to stay out of the money. If it expires worthless, you'll be able to keep the entire credit as pure profit!
Not enough information to decipher
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intro to spreads
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