Long Diagonal Bear Put Spread

Usage scenarios

When you expect the stock price to fluctuate moderately in the near future but fall in the forward period, you can use a put option with a long diagonal bear put spread.

How to build

• Sell a recent month's put option at a lower exercise price

• Buy a long-month put option with a higher exercise price

The underlying assets and quantity of the two options are the same.

Strategy brief

The purpose of a put option's long diagonal bear put spread is to simultaneously profit from the loss of time in recent months and the fall in asset prices over the past month.

Ideally, after an investor opens a position, the price of the underlying asset fluctuates smoothly until the option expires in recent months and becomes an illusory option.

After the recent month's options expired, the strategy left only long positions with long-month put options. If the underlying asset starts to drop sharply at this point, investors can profit twice.

In this strategy, the price of a recent month put option with a low exercise price is theoretically lower than the price of a long-month put option with a high strike price, so the capital was in an outflow state at the beginning of the strategy's establishment.

After the recent month's options expire, you can choose to simultaneously close one-month options or open other options to form a new option strategy according to different market conditions.

Furthermore, when other conditions are equal, the size of the price difference between the two exercise prices, the length of the date difference, and volatility together determine the size of potential profits and losses.

Overall, this is an advanced strategy that requires comprehensive dynamic consideration of the three dimensions of direction, time value, and volatility, and is not suitable for novice options users.

Risks and benefits

Maximum benefit: Limited. Maximum profit is achieved if the stock price is equal to the recent month's exercise price on the maturity date of the recent month. This is a dynamic value, which depends on the dynamic value of the long-month option at this time, and this price is affected by volatility and cannot be confirmed in advance. The formula is: the price of a long-month option when it expires in the most recent month - net option premium.

Maximum loss: Limited. The option premium that was spent.

Break-even point: only one. It is located between the two exercise prices. It is also a dynamic value, determined by the price of the long-month option when it expires in the recent month.