Put spread

Buying a put and writing one at a lower strike. As a bear put spread it backs a moderate fall cheaply; as a hedge it cuts the premium, but protection stops at the lower strike.

Where you will meet it

Put spread appears in 2 learning outcomes on the CFA syllabus. A few of them:

• Explain, for bull and bear spreads, straddles and collars, the objective, structure, payoffs, risks, value and profit at expiry, maximum gain and loss, and the underlying price at which each breaks even
  CFA Level III · Derivatives and Risk Management

  “A bear put spread buys the higher-strike put and writes the lower: same maximum profit and loss, breakeven XH − net premium.”

• Explain techniques that cut the cost of hedging and alter the risk and return profile of a portfolio holding foreign-currency assets
  CFA Level III · Derivatives and Risk Management

  “A put spread writes a lower-strike put against the bought one, so protection stops below that strike.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with P · Glossary