An options strategy wherein the investor uses a combination of bull put spread and a bear call spread.
It is a non directional strategy that is designed to earn a profit when the underlying security is perceived to have little or no volatility.
When to use this strategy?
This strategy is used when the investor is expected little volatility in the price of the underlying security in the short term.
How to build this strategy?
This strategy has four legs:
Leg 1 – Sell 1 OTM Put
Leg 2 – Buy 1 OTM Put with even lower Strike Price
Leg 3 – Sell 1 OTM Call
Leg 4 – Buy 1 OTM Call with even higher Strike Price
Credit Spread/Debit Spread
This is a Credit Spread Strategy.
This strategy has limited profit potential.
The maximum gain is limited to the net premium received by the investor while entering the trade.
When is this strategy profitable?
The investor earns maximum profit when the price of the underlying security at expiry is between the strike price of the call and the put options that are sold.
The investor faces limited risk in this strategy.
Although the risk is limited, the maximum loss that an investor faces is greater than the maximum profit that the investor can earn in this strategy.
When is this strategy unprofitable?
The investor bears maximum loss when the price of underlying security is either greater than the strike price of the call option purchased, or less than the strike price of the put option purchased.