Question

IBM is trading at $121. Create a put credit spread with strike prices of X = $120 @ $3 and X = $130 @ $12. What does that look like? The stock rises to $140. What is your profit or loss? The stock falls to $102. What is your profit or loss?

Answer 1

Since the put credit spread is primariily a bullish strategy, it involves seeling a put option while simulataneously buying another put option.

Sell 1 put for $120 - Premium received -> $3

Buy 1 put for $130 - Premium paid -> ($12)

Net Premium credit - ($9)

Current stock price - $121

If the stock price rises to $140, SP $120 becomes out of money and SP$130 would also be out of money,

Net profit would be $140-$130 => $10

Net Pay off would be (Profit - Premium credit) = 10-9 =>$1

If the stock price falls to $102, SP $120 becomes in the money and SP$130 would also be in the money,

Net profit would be ($130-102) - ($120-102) = $10

Net Pay off would be (Profit - Premium credit) --> 10-9 =>$1