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An investor buys for $3 a three-month put with a strike price of $38 and sells...

An investor buys for $3 a three-month put with a strike price of $38 and sells for $1 a three-month put with a strike price of $34. What are the profits from this bear spread strategy?

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Answer #1

Answer : Under Bear spread strategy , Put option having lower strike Pice is sold and Buy Put Option having higher strike Price.

To calculate the profits from bear strategy we first nee to calculate loss

Buy Put option at strike price of $ 38

Outflow of Premium = $ 3

Sell Put option at strike price of $ 34

Inflow of Premium = $ 1

Initial Outflow = Maximum Loss = $3 -$ 1

= $ 2

Maximum Gain = Difference in Strike Price - Maximum Loss

= (38 - 34) - 2

=4 - 2

=$2

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