Equity and Index Options Explained

16

Short Put Spreads (Bull Put Spreads)

A put spread consists of two legs: a short put and a long put. We have already seen that a long put spread, sometimes called a bear put spread (because it is bearish in nature) consists of a long put with a higher strike and a short put with a lower strike. A short put spread, sometimes called a bull put spread (because it is bullish in nature), consists of a short put with a higher strike and a long put with a lower strike.

Exercise 16.1: Bull Put Spreads

Given the option prices in Table 16.1, consider the following questions about selling the Sep 500/460 put spread. Note that, for the purpose of clear and simple illustration, these Greeks are both theoretical and rounded.

1. What are the two legs of the spread?
2. What is the risk/reward on the spread?
3. What is the net delta of the spread? Other things being equal, what should the spread be worth if the BP share price rises by 10p?
4. What is the net theta of the spread? Other things being equal, what should the spread be worth in 4 days’ time?
5. What is the net vega of the spread? Other things being equal, what should the spread be worth if market volatility falls by 3%?
6. For what reasons might this put spread be sold?

Exercise 16.1: Answers

1. Selling the 500/460 put spread consists of two legs, selling the 500 put at 20 (the short leg) and simultaneously buying the 460 put at 10 (the long leg).

   Table 16.1 LIFFE September BP option prices and Greeks as at the close on 21 July 2008 (BP share price ...