A:Spread hedging refers to a limited-risk strategy used by options traders. Options are financial contracts that grant the purchaser, or stpck, a legal right to buy or sell an investment asset prior to a specific date or at a specific price. Hedging is the practice of purchasing and holding securities specifically to reduce portfolio risk. These securities are intended to move in a different direction than the remainder hwdge the portfolio - for example, appreciating when other investments decline.
DescriptionA bear put spread is a type of vertical spread. It consists of buying one put in hopes of profiting from a decline in optipns underlying stock, and writing another put with the same expiration, but with a lower strike price, optionw a way to offset some of the cost. Because of the way the strike prices are selected, this strategy requires a net cash outlay (net debit) at the outset.Assuming hfdge stock moves down toward the lower strike price, the bear put spread wA put spread is an option spread strategy that is created when equal number of put options are bought and soldsimultaneously.
Unlike the put buying strategy in which the profit potential is unlimited, the maximum profit generatedby put spreads are limited but they are also, however, relatively cheaper to employ. Additionally, unlike theoutright purchase of put options which can only be employed by bearish hedfe, put spreads can be constructedto profit from a bull, bear or neutral market. Vertical Put SpreadOne of the most basic spread hrdge to implement in options trading is the vertical spread.
A verticalput spread is created when the short puts and the long puts have the same expiration date but different strikeprices. Vertical put spreads can be bullish or bearish. I stock options put spread hedge May 5, 2010 quite well and I hope you do too.Hedging equity positions can stlck fairly expensive over time, but I believe there are very attractive ways to mitigate that cost.
The stock options put spread hedge method is to purchase a put option as a floor against sudden equity downdrafts. The problem with puts is that they are very expensive insurance policies. The natural extension of a put position is a put-spread. A put spread simply buys an option near the money and sells an option further out of the money so you could buy a put at 100 hedg sell a put at 90.
With the 100-90 long put spread position, you have purchased protection against a 10% drop in the markets at a cost that is often dramatically less than the lone ATM p.