Today, we shall learn about the Put Front Spread options strategy in this article. The spreads strategies generally have a large profit window due to the long spreads involved.
A put ratio spread strategy is a neutral to bearish strategy. This strategy is created by buying a put debit spread with one extra short put at the short strike price of the debit spread. Traders generally enter this strategy for the net credit; thus, no upside risk is involved.
How to set a put-front spread options strategy?
In order to set up a put front spread options strategy; traders need to follow the below order:
Buy a put option at ATM or OTM
Sell two further OTM put option contracts at a low strike price for receiving the net credit.
The highest profit on the Put Front spread:
The distance or the spread between the long strike price + short strike price + credit received will be the highest profit on this strategy for the trader.
Let us understand a put-front spread options strategy with an example:
As we saw in this strategy, traders sell the near-month put option and buy the farther OTM option contracts.
Suppose the stock of ABC is currently trading at ₹50. Now trader sells a put option with a strike price of ₹50, expiring in 30 days, and receives a premium of ₹2.
Further, he buys a put option contract with a low strike price of ₹45, which also has the same expiry of 30 days. The premium paid for buying this put option contract is ₹0.50.
Thus, the net premium profit upon entering the strategy is ₹2-0.50 = ₹1.50. (₹150 on the contract).
Regardless of the price moving in your favor, traders will have a profit of ₹150.
This strategy limits the traders' profit potential and reduces the potential loss. In case the price of the stock remains above ₹50 at the time of expiry trader will keep the initial credit received of ₹2. In case the stock price falls below ₹45, then traders will lose ₹3.5, which is the difference between the spread minus the net premium (₹5-₹1.5).
This strategy is very useful when the trader is expecting a slight fall or decline in the underlying asset price.
How to exit from the put-front spread strategy?
In order to exit from the put front spread strategy, traders can roll the entire spread to a later date.
Close the entire spread and enter into a new one.
Conclusion:
So, we have seen that when the market does not have any significant movement, traders can implement this strategy and limit their profits as well as losses. When the call options are used, it is known as call front spread, and when the put option contracts are used, it is called put front spread. It is very simple to implement. In case you need more explanation on this strategy, you can reach us at 8447445815 / 9909978783.