An aggressive bull spread using call options is discussed in the text. Both of the options used have relatively high strike prices. Similarly, an aggressive bear spread can be created using put options. Both of the options should be out of the money (that is, they should have relatively low strike prices). The spread then costs very little to set up because both of the puts are worth close to zero. In most circumstances the spread will provide zero payoff. However, there is a small chance that the stock price will fall fast so that on expiration both options will be in the money. The spread then provides a payoff equal to the difference between the two strike prices, .
- Primary Market and Secondary Market
- Direct Materials