The bull put spread example in Stock Market

The bull put spread example is explained in this article. Spreads are designed to take advantage of the price relationship between two or more options. Bullish speculators use primarily what are called "bull spreads" to reduce their risk. In the bull put spread example, the speculator buys and sells calls having the same (but not always) expiration date. The striking price on the calls, however, will be different. In a bull spread, the call written will always have a higher striking price than the call purchased.

Calendar Spread

  Another type of bull put spread example is that may be attractive to the bullish investor is the calendar spread, wherein the speculator buys and sells calls with different expiration The bull spread is a strategy designed for those who have a very positive outlook for the underlying stock but. want to hedge just in case. They buy and sell calls at the same time. The call bought will have a lower striking price than the call sold but have the same maturity. The easiest way to do a bull spread is to purchase an at-the-money call and sell an out-of-the-money call on the same stock. The objective is to be long on the option that will have a greater price increase if the market rises. The short position, which produces income, reduces the cost of the long position.

Dates, hoping that when she makes her closing transactions the credits to her account will exceed whatever the costs of the spread were. The buy and sell transactions required to close out the calendar spread must be made simultaneously.

There are other types of bull put spread example, but these are either combinations of bull and bear strategies or require so many positions at one time that they represent too much of a hedge to make being in the market worthwhile except when some very special price movements occur.

Arbitrage

Spreads of the above type, which are especially designed to hedge the speculator's bet, are very different from the types of spreads that speculators, such as arbi­tragers, may use as part of their aggressive speculative programs. In arbitrage, profits are realized from the spread between stock prices in different markets.

 

Arbitrage, however, is no game for the little guy. It is a game for only the highly skilled, the highly experienced, and the well-placed. By well-placed I mean that the investor is able to take advantage of immediate developments, which the average investor, listening to cable reports or occasionally checking his computer's stock quote program, cannot do.

Covered calls

 Covered calls are by nature a hedging tool. With the covered call, you are immedi­ately long on the underlying stock and short on the option.

With a covered call strategy, you can bring in extra income even when the under­lying stock is relatively stagnant. This is because once you sell the call, you receive the premium (less commissions). The premium is yours to keep. If the underlying stock never reaches the striking price before expiration time, you get to keep the stock as well as the premium.

On the other hand, if the stock is called, you get to:

•          Keep the premium.

•          Profit on the underlying stock.

But you can only be sure of profit on the underlying stock if you have written covered calls that are sufficiently out-of-the-money.