Time decay it depends on the underlying share price

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Unformatted text preview: if it is below A, then time decay works for you. If it is above B, then it works against you. Profit A 0 B Loss 12 PUT RATIO BACKSPREAD Construction: Sell 1 Put at B and Buy 2 Puts at A. Margins: Yes. Your Market Outlook: Bearish. The share price will expire well below A. The strategy provides protection if the share price increases as you will profit from the sold Put. Profit: The maximum profit is limited on the downside to the strike price plus the net credit received, as the share price can't fall below zero. It is limited on the upside to the net credit received when opening the trade. Loss: The maximum loss is equal to the difference between B and A less the net credit received and it occurs at A, as your bought Puts expire worthless and you lose on the sold Put. Volatility: Generally volatility will be beneficial on this trade, as volatility increases the value of Puts increases. Time Decay: It depends on the underlying share price, if it is below A, then time decay works against you on the 2 bought options. If it is above B, then it works for you on the 1 sold optio...
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This note was uploaded on 08/30/2009 for the course FINM 3405 taught by Professor Philipgray during the Three '09 term at Queensland.

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