Comparision (DIAGONAL BEAR PUT SPREAD
VS COVERED PUT)
Compare Strategies
DIAGONAL BEAR PUT SPREAD
COVERED PUT
About Strategy
Diagonal Bear Put Spread
When the trader is neutral – bearish in the near-month and bearish in the mid-month, he will apply Diagonal Bear Put Spread. This strategy involves buying Mid-Month ITM Put Options and selling (short/write) equal number of Near-Month OTM Put Options, of the same underlying asset. This strategy bags limited rewards with limited risk.
This strategy is exactly opposite to Covered Call Strategy. Here the investor is neutral or moderately bearish in nature and wants to take advantage of the price fall in the near future. The trader will short one lot of stock future. Now the trader will short ATM Put Option, the option strike price will be his exit price. If the prices rally above the strike price, the ..
This is a dynamic trade with many possible scenarios and future trades, it is impossible to calculate a breakeven.
Futures Price + Premium Received
DIAGONAL BEAR PUT SPREAD Vs COVERED PUT - When & How to use ?
DIAGONAL BEAR PUT SPREAD
COVERED PUT
Market View
Bearish
Bearish
When to use?
When the trader is neutral – bearish in the near-month and bearish in the mid-month, he will apply Diagonal Bear Put Spread. This strategy involves buying Mid-Month ITM Put Options and selling (short/write) equal number of Near-Month OTM Put Options, of the same underlying asset
The Covered Put works well when the market is moderately Bearish.
Action
Sell 1 Near-Month OTM Put Option, Buy 1 Mid-Month ITM Put Option
Sell Underlying Sell OTM Put Option
Breakeven Point
This is a dynamic trade with many possible scenarios and future trades, it is impossible to calculate a breakeven.
Futures Price + Premium Received
DIAGONAL BEAR PUT SPREAD Vs COVERED PUT - Risk & Reward
DIAGONAL BEAR PUT SPREAD
COVERED PUT
Maximum Profit Scenario
'Premiums received - Initial premium to execute + Strike price - Stock Price on final month
The profit happens when the price of the underlying moves above strike price of Short Put.
Maximum Loss Scenario
When the stock trades up above the long-term put strike price.
Price of Underlying - Sale Price of Underlying - Premium Received
Risk
Limited
Unlimited
Reward
Limited
Limited
DIAGONAL BEAR PUT SPREAD Vs COVERED PUT - Strategy Pros & Cons
DIAGONAL BEAR PUT SPREAD
COVERED PUT
Similar Strategies
Bear Put Spread and Bear Call Spread
Bear Put Spread, Bear Call Spread
Disadvantage
Higher commissions due to additional trades. , Changes maximum profit potential of call or put spreads.
• Limited profit, unlimited risk. • Trader should have enough experience before using this strategy.
Advantages
The Risk is limited.
• Investors can book profit when underlying stock price drop, move sideways or rises by a small amount. • Able to generate monthly income. • Able to generate profit from fall in prices or mild increase in the prices.
