How put spreads work

Trading Strategies
Saxo Be Invested

Saxo Group

Put spreads are an investing strategy that requires you to simultaneously take long and short positions on the same asset. We’ll cover this strategy’s benefits and drawbacks in more detail. 

Simply put, put spreads are a risk-management strategy because you’re holding two contrasting positions at the same time during potentially volatile market conditions. 

What are put options? 

A put option, sometimes simply known as a put, is a contract that gives the holder the right (but not the obligation) to go short on an asset at some point in the future. The contract is linked to an underlying asset (financial security). This means you’re not buying the actual asset, but a contract attached to it. 

With a put option, you’re taking out an order that gives you the right to short (sell) the asset at a predetermined price at an agreed date. The predetermined price is known as the strike price. 

So, you can take out a put option and, on the agreed date, sell the asset at a strike price agreed at the time you placed the order. This means the strike price isn’t based on the current market conditions/value of the asset. 

A put option is the opposite of a call option. Call options involve taking out a contract to go long (buy) an asset for a predetermined price on an agreed date. Again, a put option is where you go short (sell) for a predetermined price on an agreed date.

Going long vs. going short in trading 

You can only understand put spreads if you know what put options are and what going long vs. short means. 

Going long

You’re buying the asset/contract because you believe its value will increase. Therefore, you have a long-term vision, i.e. you’re going to hold the asset for a long time so you can sell it for a profit once its value increases. 

Going short 

You’re selling the asset/contract because you believe its value will decrease. Therefore, you have a short-term vision, i.e. you’re going to borrow the asset, sell it at the current market rate, then buy it back in the future for a lower price. 

The difference between the amount you initially sell for and the buyback is your profit. For example, if you “sell” for $10 and “buy” it back for $8, you’ve made a $2 profit. 

These are the two ways you can trade many financial securities, including stocks, forex and commodities. Put spreads require you to take both positions at the same time. You can think of this as covering both bases and holding two sides of the same coin. 

How to make put spreads in trading 

OK, so we know that put spreads in trading are when you hold long and short positions on the same option. There are various ways you can do this, and we’ll list them in a moment. What you need to know before that, however, is the fundamental variables you’re working with. 

When you’re executing a put spread strategy, you need to think about strike prices and expiry dates. As we’ve said, put options are based on predetermined prices and dates. Therefore, you can adjust these based on the market conditions and your preferred strategy. 

For example, a vertical put spread is where your long position (long put) and short position (short put) have the same expiration date (i.e. a date in the future) but different strike prices. Other put spreads can have different expiration dates and strike prices. This means you can employ a variety of options strategies based on the market conditions. 

Types of put spreads

The types of put spreads you can make, are:

Vertical put spread 

Vertical put spreads have the same expiration date but different strike prices. They can be used as part of a bullish (the price of an asset is increasing) or bearish (the price of an asset is decreasing) strategy: 

Bullish vertical put spread = Implement when you think the asset’s price will increase before the put options expire. 

Bearish vertical put spread = Implement when you think the asset’s price will decrease before the put options expire. 

Calendar put spread 

Also known as a horizontal put spread, this strategy requires you to find long-term put options and sell short-term put options with the same strike price. You buy the long-term options at the same time you sell the short-term options. Calendar put spreads can be neutral or bearish: 

Neutral put spread = If you believe the short-term outlook for the asset is neutral (i.e. its value isn’t going to increase or decrease significantly), you can use the current prices (at-the-money put options) to execute your simultaneous buy and sell orders. 

Bearish put spread = If you believe the short-term outlook for the asset is bearish (i.e. its value is going to decrease), you can use the future prices (out-of-the-money put options) to execute your simultaneous buy and sell orders. This strategy aims to sell the short-term options and use the long-term puts to buy back the asset at a lower price in the future (the price will be lower if your assessment of the asset’s value decreasing is correct). 

Diagonal put spread 

This put spread is where you buy long-term put options and sell short-term put options with a higher strike price. As well as different strike prices, the expiration dates differ with diagonal spreads. This means it’s possible to take advantage of bullish and bearish conditions. 

Benefits and drawbacks of put spreads 

Put spreads aren’t always a good idea, particularly if you’re a novice trader who is just learning the basics of put options. This is because they can be tricky to understand and even trickier to execute because you need to have a strong understanding of strike prices and expiry times. 

You then need to combine this knowledge with technical analysis and fundamental analysis to help determine the market conditions. 

If you’re comfortable with this, put options are a way to manage risk because you’re taking out two contrast positions. This means you’re hedging one against the other or giving yourself the ability to offset losses from one position with profits from another. This also means you can use put spreads in many market conditions, regardless of whether it’s bullish or bearish. 

Put options can be a useful tool to have in your kit. It may not be the right strategy for you, but it’s something to consider if you’re trading put options. 

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.