questions about bear put spreads

Discussion in 'Options' started by fusiforme, Mar 20, 2013.

  1. I would like to try trading some spreads but have never done so before. I have read about spreads in books and on the web but there always seem to be a few details which aren't discussed which I am left wondering about.

    I'd like to consider an example using something I own and get some feedback from forum members.

    Right now I own 5 FXI August 34 puts. Can I sell 5 puts against this for any month before August? Could I sell April puts, or weekly puts, and just keep doing this, assuming the the puts expire each time? I have read that you should sell puts for the same month as you have bought them but nobody explains why.

    Let's say I don't think FXI will fall below 34 by this April. If I wanted to generate some good income on my position, I could write puts for April 33.50. If they expire worthless I pocket the premium and keep my August 34 puts, and could then consider if I wanted to write more puts for May.

    Hopefully I have understood this correctly, but if I haven't, I hope someone can put me straight.

    But what happens if FXI *does* go down below 34 and reaches 33.50 and I am assigned?

    I'm not sure what happens then. I can't find any article that clearly explains the process should assignment occur in this situation.

    If FXI did go down to 33.50 in April, my August 34 puts would have a lot of value. Would these somehow be "exchanged" by my brokerage for the April puts I had written, and if so, would I still be able to keep the profit my August puts had generated?

    Alternatively what if FXI begins going in the opposite direction to what I expect and I want to exit my position? In this case, unless I want to leave the puts naked, it looks like I must first to buy back the the puts I wrote, and then sell the puts I bought, so I will actually end up losing money on the sale, since I will have to buy back.

    I have also read that some traders will buy back the options they are selling if they are increasing in value before they can be exercised. At that point the options are going to be more expensive, so by buying them back one ends up losing money. Is there any reason for doing this, unless you are writing naked puts? What is the strategy with this? And what are the situations where it is a good idea to buy back the puts one has sold?

    I'm also wondering how you deal with a spread in expiration month if your position is profitable. Suppose August comes around and I have a profit on my FXI puts and I have also written August puts which have increased in value but not yet reached the price where I would be assigned. What do I do in this case if I want to take profit on my position but not incur the risk of selling naked puts? Do I have no choice but to buy the puts back first?

    It seems like writing puts against puts you own can end up being a hindrance in many ways. The one plus if the income if the puts expire worthless, but in any other case it seems to cause complications and impose limits on what you can do with your position. Is this accurate? Is it worth the income generated?

    Much thanks to anyone who can shed some light on these matters for me.
  2. vertical spreads are very different from horizontal spreads..
    a vertical is in one series.. or one expiration however you would like to put it ..
    a horizontal is across the term structure in any fashion..
    long calender.. short front long back option..
    this can be done in ratios, and or diagonally.. meaning not the same strike..

    start reading.... puts that go into the money will be assigned typically only at expiration if your short

    read Sinclair or Hull..