put spread – a frequently useful option strategy

(Based on a Barron's 6/20/2011 article) If you anticipate a stock (or ETF) depreciation in a few months, you can sell an OTM call, then use the /proceeds/ to finance a “put spread”.

Eg: iShares Trust MSCI EAFE Index Fund (Ticker EFA). In June, the EFT was 58.
– sell Jul 60 call for a premium
– buy Sep 56 put, which costs more than the other put, and need financing from the call's proceeds
– sell Sep 52 put

Note, as usual, all the calls and puts are OTM — in the spirit of term insurance, where premium should be low-cost to be efficient.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s