 Hello and welcome to this session. This is Professor Farhad in which we would look at options, strategies and specifically we would look at a spread and to be more specific we're going to be looking at a bearish spread. This topic is covered on the CFA exam as well as essentials or principles of investments. As always I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1800 plus accounting or I think finance as well as Excel tutorials. If you like my lectures please like them and share them. Connect with me on Instagram on my website farhadlectures.com. You will find additional resources to complement and supplement your accounting and finance education. We're going to look at in this situation a bearish spread. It means we are pessimistic about the stock. We think the stock is going to go down. So what can we do? We can basically shorten the stock but that's pretty dangerous. So what do we do? We can do a spread. What is a spread or puts? We're going to be dealing with puts on the same stock with different exercise prices or time or time expiration. Simply put you are going to buy and sell a put in this situation. You're going to some options are bought while others are sold and specifically we're dealing with put because we are dealing with a bearish spread here. So a money spread involves the purchase of one option and the sale of another option with a different exercise price. Remember money, price. A time spread refers to the sale and purchase of options with different expiration date. Date, time. Okay so let's take a look at how we do things. So if we are bearish we can buy a put option. Let's assume we buy a put option, a September 50th put option and we paid five dollars. The reason I put negative it's just to kind of remind you we paid five dollars. So this is what it looks like. This is the profit and loss vertical line. This is zero and the strike price is 50 and we paid five dollars. So here's what's going to happen. As long as the stock price don't dip below 50, don't dip below 50, basically our option is useless because we are buying the protection if it goes below 50. Once it hits 50 it will start to pay off because now it's in the money and it will keep paying off. I mean it will be in the money until we hit the break even point which happens to be 45. Why 45? Because the strike price is 50 but it costs us five dollars. Therefore we're only going to make money if it's below 45. Although we can sell it at 50 but we still paid five dollars. So basically our break even point is 45. Now anything below 45 basically we can sell it at 50 and make a dollar for every dollar it goes below 45. So our profit technically could go all the way down. If it goes down to zero we could make a profit of 45 dollars. Why? Because if it goes down to zero we can sell it at 50. We can sell it at 50 it costs us five so our profit is 45 because if it's at zero we don't have to... it's basically useless okay but we make a profit of 45 because we can sell it at 45 we can sell it but in reality it's zero. Now let's sell a September put 46 put and receive two dollars. So simply put we paid five to buy the put we got two dollars to sell the put now we are at negative three in total negative three in total. This is this is our new cost okay now basically what's going to happen is this. Let's take a look at our profit line with a combination of these two. This is the profit loss this is zero this is the stock price now the strike price is 50 the price is 50 50 then one stock one stock price exercise price is 50 for this option and for the other option is 46. Now your your profit and loss would look something like this you're going to be starting at negative three so rather than five put it up five dollars now you only put three dollars for this strategy. So anything above 50 if the stock is above 50 basically you would lose three dollars. Once it goes down below 50 it's going to start to kink up and basically now your break even is not 45 your break even now is 47 your break even is 47 so this is your break even why 47 because you can sell it at 50 but you still have to pay three dollars your break even at 47 so what what happened is this after 47 you will start to make profit but as soon as the stock hits 46 then the other option that you sold will start to work against you therefore you would make a so your profit will be limited to a dollar okay now although okay you're saying well if the stock price goes down further don't I make money on this option yes you'll make one dollar on this option you'd lose one dollar on this option going forward therefore you're going to make one dollar and this is basically the spread the spread for you so you made a dollar so your max profit is a dollar so when do you use this strategy you would use this strategy when you think the stock price it's going to go down but not too much if you think the stock price it's going to go down let's assume theoretically to zero you just don't you don't sell the spot you just let it go slide and if it slides you know it goes down to zero and you'll make the money you'll make you know you will make as we said 45 dollars so here you think it's going to go down but not too much not too much therefore you will make that easy not easy in quote relatively safe small amount relatively safe small amount so simply put you're only paying you could lose three dollars but there's a good chance you could make a dollar that's basically what you are what you are doing here okay in the next session we would look more at different option strategies as well or I might just work and exercise to combine all those as always I'm going to ask you to like this recording if you if you like it share it put it in playlist and don't forget to visit my website farhatlectures.com the compliment and supplement your discourse as well your other accounting and finance courses good luck study hard and stay safe