bearPutSpreadInitialValueV0 {bearishTrader}

Displays graph of per share Net Debit (V0Dr) on initiation day for Bear Put Spread in the Plots tab.

Description

A bear put spread is established by buying a put option with a higher strike price and writing a put option on the same underlying stock with the same expiration date, but with a lower strike price. Like bull call spreads, the purchased option tends to be at-the-money and the written option out-of-the-money (Kakushadze & Serur, 2018). Suppose HypoMart stock is trading at $17. An investor creates a bear put spread by buying the HypoMart May 17 put at $4 and selling the HypoMart May 14 put at $3, at a net debit (net cash outflow) of $1 .

Usage

bearPutSpreadInitialValueV0(
  ST,
  XH,
  XL,
  PH,
  PL,
  hl = 0,
  hu = 1.5,
  xlab = "Spot Price ($) at Expiration",
  ylab = " Initial Value [ V0] ($)",
  main = "Bear Spread using Puts V0 [Dr/Cr]"
)

Arguments

ST

Spot Price at time T.

XH

higher Strike Price or eXercise price.

XL

lower Strike Price or eXercise price.

PH

Put Premium on higher Strike.

PL

Put Premium on lower Strike.

hl

lower bound value for setting lower-limit of x-axis displaying spot price.

hu

upper bound value for setting upper-limit of x-axis displaying spot price.

xlab

X-axis label.

ylab

Y-axis label.

main

Title of the Graph.

Details

According to conceptual details given by Cohen (2015), and a closed-form solution provided by Kakushadze and Serur (2018), this method is developed, and the given examples are created, to display per share Net Debit (V0Dr) on initiation day for Bear Put Spread. EXAMPLE, Buy HypoPharma December 17 put at $4.00 and Write HypoPharma December 14 put at $3.00. This is a vertical spread consisting of a long position in a put option (close to at-the-money) with a strike price XH, and a short position in an put option (out-of-the-money) with a lower strike price XL. This is a net debit trade. The outlook of the trader (investor) is bearish and trader profits if the stock price falls. The graph gets displayed in Plots tab. Horizontal Straight Line on the graph represents that V0Dr is same irrespective of spot price at expiration.

Value

Returns a graph of the strategy.

Author(s)

MaheshP Kumar, [e-mail]

References

Cohen, G. (2015). The Bible of Options Strategies (2nd ed.). Pearson Technology Group. https://bookshelf.vitalsource.com/books/9780133964448
Kakushadze, Z., & Serur, J. A. (2018, August 17). 151 Trading Strategies. Palgrave Macmillan. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3247865

Examples

bearPutSpreadInitialValueV0(17,17,14,4,3)
bearPutSpreadInitialValueV0(40,40,35,1.85,0.50,hl=0.8,hu=1.2)
bearPutSpreadInitialValueV0(500,500,495,9,7,hl=0.95,hu=1.02)