My vehicle is a bull put spread that expires on Feb. 19, 36 days from today. The structure of the spread is that I buy a put with a lower price, 25 in this case, and sell a put with a higher strike price, 27 in this case. The lower strike is below the current trading price, and the higher strike is above it.
The stock was trading at 25.39 when the trade cleared. The bull put spread gave me a credit of 1.20. . . .
The short high-strike put acts like long shares with some leverage. The option like the shares makes money as the stock price rises.
The long lower-strike put hedges that bet and reduces the money required for the position.
A short put is an obligation to buy the stock at the strike price. That means my broker will require me to tie up enough money to buy those shares. With ORCL trading at 25.37, that means $2,537 for each contract.
The long put, by giving me the right to buy at a price near-by price, reduces that requirement to a few hundred dollars.
The reward/risk ratio is 3:2, meaning at best I can gain $3 and I risk losing $2. The spread is profitable at expiration if the stock is trading at 25.80 or better.
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